The discussion paper:
- Sets out the background to the issue, explains how these contracts work in practice and the interaction with the tax rules for travel and subsistence (Section 3)
- Sets out the case for change, including the impact of these arrangements on the Exchequer (Section 4)
- Outlines proposals for tackling these issues (Section 5)
- Summarises the key questions and issues we would like to test with external stakeholders and sets out next steps (Sections 6 and 7)
The response to this document will inform decisions for Budget 2015. However, any proposed measure to address this misuse will not come into effect until 2016 at the earliest. This will allow time for people working under an OAC to make informed decisions, and to remove themselves from an OAC if they wish without being disadvantaged.
Question 1: Do you agree with our description of an OAC?
The concept of an OAC has been considered in law on a number of occasions; one of the most recent and pertinent is the case of Reed Employment PLC and Others v HMRC. It was noted “for an overarching contract to be found, rather than a series of separate contracts, there must be mutual obligations subsisting between each separate engagement. There must be subsisting mutual obligations continuing throughout the relevant period and between each separate engagement”. It has been accepted in a number of cases that a global or overarching contract can exist without necessarily the obligation to offer and accept work but that there must be an irreducible minimum; the example commonly used is the payment of a ‘retainer’ during such periods when no work is available. This would appear to be the position adopted by HMRC as indicated by their Employment Status Manuals and it corresponds with existing case law therefore there should be no reason for this position to be altered.
Question 2: Do you agree with our description of how OACs are used? Are there variations, which we haven’t covered here?
Agency Travel Schemes
It is our understanding that the use of OACs for workers employed on such terms by Agencies is purely to turn what would be considered a permanent workplace into a temporary workplace or a second workplace. But for the OAC it is highly unlikely that the workers would qualify for tax relief as they would fall either into the definition of agency worker and/or a fixed term appointment as most workers operating through agencies will be employed for a single assignment at a single workplace.
Umbrella and Personal Service Companies
Umbrella Companies and Personal Service Companies use OACs simply to satisfy HMRC that the workers are in fact employees. As case law has developed and legislation has been implemented the contracts contain clauses that support the employer and employee relationship, whether the worker is controlled, directed and supervised by the end user client or not.
Once the employment relationship is established, whether the employee is entitled to tax relief or not will then be based upon the reality whether he is working at a temporary workplace or a permanent workplace.
A Hybrid Model uses an OAC to establish an employment for Income Tax and National Insurance purposes, but for all other purposes the worker is self-employed. Typically, the worker will only be with this model for one assignment as the only person(s) who benefit from this arrangement are the agency supplying him and/or the scheme administrator.
Generally, workers are forced into such schemes by agency consultants, chasing rebates/referral fees or a competitive edge, and are not aware what rights they have sacrificed in signing the Hybrid Contract.
There is absolutely no benefit to the economy from such schemes; the best description is that they are exploiting the workers that legislation is designed to protect and at worst are illegal and inevitably set up to wind up at some date.
Pay Day by Pay Day Models (NMW / Low Paid Travel Scheme (NMWLPS)
There are various versions of these schemes and the OAC as with the Agency Travel Scheme and Hybrid Model are used to create a temporary or second workplace in support of tax relief for travel expenses.
By itself this model would not be viable, so the NMWLPS seeks to show compliance with NMW on one hand, but gives a real time deduction for travel and subsistence contrary to HMRC guidance. Typically, the worker will be only with this model for one assignment as the only person(s) who benefit are the agency supplying him and/or the scheme administrator.
Generally, workers are forced into such schemes by agency consultants, chasing margin or a competitive edge, and are not aware what rights they have sacrificed in signing the Contract.
There is absolutely no benefit to the economy from such schemes; the best description is that they are exploiting the workers that legislation is designed to protect and at worst are illegal and inevitably set up to wind up at some date.
Question 3: Do you agree with our description of why OACs are used? What is the main motivation for using an OAC? Are there any other reasons not described here?
For Hybrid, Agency Travel Schemes and Pay Day by Pay Day Schemes it is clear that the OACs are used to create more than an employment and, in one way or another, to bypass the T&S tests that decide whether a workplace is permanent or temporary.
For PSC and Umbrella workers the OAC does no more than create an employer and employee relationship with all the responsibilities and risks that that brings with it.
Question 4: On which of these reasons would you place most weight in explaining the recent increase in the use of OACs?
Legislative changes in recent years
The opportunities for individuals to route funds through offshore companies be falsely self-employed and the drive by agencies to ensure their supply chain is compliant, has led to more and more workers standardising their position and being employed by their own PSC or through an Umbrella Company.
Changes in Employment Patterns
There is an increasing move towards individuals being engaged by end users as required. Clients may use temporary workers, whether they are contractors or temporary workers, to assist with projects. The move may also have been triggered by increased employment costs and the increased potential for litigious claims from employees.
Package Agency Travel Schemes
Generally sold to agencies by professional advisers and in more recent years by software companies that sell software. Both are sold by the respective group with the benefit of saving the agency significant amounts of money. There has also been a move in recent months to recruitment agencies setting up their own umbrella companies to generate an additional revenue stream.
Hybrid and Pay Day by Pay Day Schemes
These schemes found favour in the low paid sector as the solution to the additional Employers Liability that had been previously avoided through the use of an Offshore Employer and/or False Self Employment models. It was highlighted in the discussion between HMRC and stakeholders that ultimately this would happen.
Question 5: Do you have any other comments? For example, do stakeholders agree that it is unfair that workers engaged through OACs with employment intermediaries get access to travel and subsistence whilst others in similar circumstances don’t?
The concept of an over-arching contract has been often considered in employment law and the following accepted as a reasonable description; “for an overarching contract to be found, rather than a series of separate contracts, there must be mutual obligations subsisting between each separate engagement. There must be subsisting mutual obligations continuing throughout the relevant period and between each separate engagement”.
If an employment intermediary engages workers under an over-arching contract, as accepted in law, then the worker will be travelling to a series of temporary workplaces as defined by HMRC; “A temporary workplace is somewhere the employee goes only to perform a task of limited duration or for a temporary purpose. The cost of travel to a temporary workplace is deductible”. Therefore, the worker does not gain an unfair advantage as their tax position will be the same as any other worker travelling to temporary locations. Unless a ‘permanent workplace’ is defined then employment intermediaries, in common with all other stakeholders, can only rely on the guidance provided by HMRC to determine whether tax relief is available in certain circumstances.
Question 6: Do you have any evidence on the extent of the usage of OACs by employment businesses?
There are around 100 umbrella companies in the UK and all of them should operate an OAC. There are over 23,000 recruitment agencies some or all of them may use OAC’s. [Sources: http://www.hrreview.co.uk/hr-news/recruitment/over-1400-new-recruitment-companies-set-up-in-last-year/53674 and http://www.freelancesupermarket.com/league-tables/umbrellas.aspx]
Question 7: Do you have and further evidence of the recent trends in the use of OACs?
Numbers of temporary workers have risen by 230,000, since 2005, to over 1.6 million [Source: http://www.tuc.org.uk/economic-issues/labour-market/labour-market-and-economic-reports/involuntary-temporary-jobs-driving]. According to the TUC, many of the moves from permanent to temporary work have been involuntary and driven by a desire by firms to cut employment costs. Very recently workers who were previously registered as Sole Traders have been moved en-masse to umbrella companies by firms who were unwilling to take on the costs of employment themselves following changes to legislation. It is assumed that the majority of workers affected by these changes will now be employed under an OAC whether operated by an umbrella company, a pay day by pay day scheme provider or a recruitment agency.
Statistics for IT contractors, who were arguably the first to work with umbrella companies are not easy to find but from the available data it would seem that they represent a small proportion of the temporary labour market [Source: http://www.itjobswatch.co.uk/contracts/uk/statistics.do].
Question 8: Do these differ between umbrella companies and employment businesses?
Firstly, there needs to be a clear distinction made between a temporary worker and a contractor. Many workers in recent years have been pushed from employment via a recruitment agency or self-employment into employment through an umbrella company. As the administrative and legal costs of employment grow there are greater incentives for companies to pass on those costs. An umbrella company will take on the responsibilities and costs of employment but will also often sign indemnity agreements with recruitment agencies which absolve the agency of any future potential financial liability. Unfortunately, most companies that have pushed workers into employment with umbrella companies have not passed on their cost savings which means that many workers will be financially worse off. To address this some companies that refer to themselves as umbrella companies will operate the business model incorrectly, often giving tax relief where it should not be due e.g. pay day by pay day schemes.
Employment Business/Agency Travel Schemes generally use the OAC to create a secondary workplace and this trend has to some degree been driven by the ability to save costs and gain a competitive advantage. The OAC allows them to totally side step the Travel and Subsistence tests that would deny Tax Relief if applied. Agency workers generally, will be engaged for up to 13 weeks after which point they leave, moving to a new agency and new client. There is no intention to create an employer and employee relationship.
The workers who are engaged under these types of scheme are generally low paid and are assigned to work placements by the recruitment agency.
Umbrella Companies originally sought to attract highly skilled workers that see contracting as their career and will work on assignment after assignment, client site after client site, and will be actively employed for many years. These workers invariably command high daily rates and will source contract or project work either through a specialist agency or direct from the end client. As they are specialised and highly skilled workers they will simply go where the work is whenever it is available, often travelling long distances or choosing to stay away from home. The following are genuine examples of contractors working patterns:
Contractor A lives in Witney and during employment by us has worked at Enfield, Warwick, London, Cambridge, Gorleston, Ipswich, Hounslow and Stevenage.
Contractor B lives in Ashford and during employment by us has worked at Tonbridge, London, Ashford, London again, Brighton, London yet again, Maidenhead and back to London!
Contractor C lives in Haywards Heath and, during his employment, has worked at Farnborough, Littlehampton and Worthing.
Contractor D lives in Lydney and during employment by us has worked in Swindon, Wokingham and Gloucester.
[Examples provided by ContractorUmbrella Ltd]
These workers choose to be employed by an Umbrella Company as an alternative to working through a PSC; they are not forced from employment or self-employment. Therefore, the reality of their work situation will be the same and it would not be reasonable to apply any changes to the rules surrounding tax relief on travel and subsistence costs to one group but not the other.
It is clear that the OAC used by Employment Intermediaries, as highlighted in the Reed Case, does no more than seek to give the worker tax relief where it would not otherwise be due.
Question 9: Do you expect the prevalence of OACs to increase in the near future?
We would expect the use of an OAC, to create a temporary or secondary workplace, to increase in the near future if there is no preventative action taken.
We would expect the use of the Hybrid and Pay Day by Pay Day models including an OAC to create a temporary or secondary workplace to increase in the near future if there is no preventative action is not taken.
We would expect the use of OAC by Umbrellas and PSCs to continue, but would only increase in line with employment trends and the health of the UK Economy.
Question 10: Which Income Groups do you expect will be the greatest users of OACs in the future?
If action is taken to prevent OACs creating a temporary workplace or a secondary workplace, then we would see the following groups no longer utilising them: -
- Low paid workers on or near National Minimum Wage.
- Workers who would not satisfy the tests for a temporary workplace.
This would leave the groups that generally the rules had been amended to provide relief for: -
- Workers working at a temporary workplace.
It is difficult to say which Income Groups as it is not so much how much someone earns but more what is the intention of the worker.
There are career contractors/workers that move from project to project, assignment to assignment that spend weeks or months on one assignment before moving on to the next and it is this group that are the true individuals working in temporary workplaces that should continue to receive the relief for Travel & Subsistence as originally intended.
Question 11: Do you have any evidence on the extent of any competitive distortions created by misuse of the tax rules through OACs and other schemes noted in this document?
There is no reason for an agency to run a Travel Scheme or allow workers to operate through a Hybrid/Pay Day by Pay Day, other than to give them a competitive advantage and/or increase their profitability enabling them to invest in marketing to attract more clients.
Conversations arise all the time in which we are advised that agency B is able to provide workers cheaper than agency A, but with no obvious reason. Inevitably there is an Agency Travel Scheme, Hybrid or Pay Day by Pay Day and occasional Self Employed scheme behind the reduced billing rates.
In addition some workers are attracted from agency A to agency B because agency B will allow them to operate through a Pay Day by Pay Day model, where agency A knows that the workers ultimately could face tax bills.
There should be no competitive distortions between compliant umbrella companies but there may be perceived distortions stemming from inappropriate marketing: -
“Our ultimate goal is to maximise your return.' ... We provide you with full employment rights through an overarching contract of employment.”
“As a contractor, you want to maximise the returns from your own hard work. As a **** employee you will benefit from the terms of our overarching contract.”
“Maximise your income – We’ll help you claim your legitimate business expenses which are reimbursed to you tax and NI free.”
Umbrella Companies and PSCs generally are passed the full cost of employment, including the rate of pay, plus Employers NI, plus Pension, Plus Holiday Pay, in an ‘all inclusive rate’, this means that there is no competitive advantage to any agency.
Question 12: Do stakeholders agree there is a strong case for the government legislating to restrict tax relief for travel and subsistence in these circumstances?
Not in all circumstances. Only if an OAC is used to create a temporary workplace or secondary workplace.
There is certainly a strong case both ethically and for fairness to ensure that the Pay Day by Pay Day and Hybrid Models are legislated so tax relief for travel and subsistence is not due for workers in such schemes.
A suggested amendment to Part 2, Chapter 7 is detailed after question 18.
Question 13: Do you have any evidence on the likely impact of option 1? Do you think any particular sectors will be affected more than others?
Option 1, rather than introducing fairness to the tax system would, in fact, penalise workers employed by an umbrella company as employees engaged by any other employer would not be affected and would still be entitled to tax relief on travel costs to a temporary workplace as defined by HMRC. The discussion document states:
“Any change would seek to maintain the travel and subsistence expenses which can be claimed by individuals genuinely seconded to work temporarily away from their regular workplace by their permanent employer”.
If a worker is employed via an umbrella company or works through a PSC, provided that they work on more than one assignment during the engagement, they will not have a ‘regular workplace’ as their attendance at any given location will be for a temporary purpose and for a limited duration (the 24 month rule notwithstanding). Therefore, unless the definition of a temporary workplace were to be amended or replaced with the definition of a permanent workplace, umbrella company employees and PSC contractors would be disadvantaged.
Sectors that rely on attracting workers for projects that may last weeks or months may face the prospect of attempting to engage workers, who will be incurring significant costs, sometimes supporting a temporary home, for whom the contract would not be viable.
In some sectors, such as the Shipyards and Oil and Gas sector, projects can be undertaken in the shipyards and offices of the Oil and Gas Companies anywhere in the world. This means that it may be financially cheaper to engage British workers to work in the shipyards in the Netherlands or the drawing offices in Norway as any expense reimbursements are free of Income Tax in both those jurisdictions and the UK.
If workers are required to finance the costs of travel out of their net income, would this lead to an increase in the costs of employing them as it may lead to rates increasing, again would this lead to the UK being less attractive to do business.
Obviously, not all projects can be moved, but in a competitive global economy it seems contrary to the Governments policy to make the UK an attractive place to do business by reducing the Corporation Tax rate only to make the cost of employing temporary workers working at temporary workplaces potentially more costly.
As an HMRC Officer put it to a member recently, when she advised that there was to be a review of the T&S and OACs, the intention is not to penalise the people who play within the rules, but to ensure that the playing field is level. We paraphrase; she actually said, “we would not want to throw the baby out with the bath water”.
No matter how you look at option 1, the baby, water and bath is being thrown out and whilst it would achieve the desired result it would/or could result in collateral damage to the UK and its competitiveness in the Global Market.
Would option 1 also mean that any worker working through a third party on a Working Rule Agreement is not entitled to Tax Relief? If the answer is no, why not and is this fair?
Question 14: Do you have any evidence on the likely impact of option 2? Do you think that any particular sectors will be affected more than others?
It should be noted that, whatever changes are made to tax legislation, an overarching contract of employment does create continuity of employment across a series of assignments, which by their nature, must be considered temporary. What constitutes an overarching employment contract (as opposed to a contract which is referred to as such but not contain the requisite components) was explained quite clearly by Elias J in Stephenson v Delphi Diesel Systems :
“. The issue of whether there is a contract at all arises most frequently in situations where a person works for an employer, but only on a casual basis from time to time. It is often necessary then to show that the contract continues to exist in the gaps between the periods of employment. Cases frequently have had to decide whether there is an over-arching contract or what is sometimes called an ‘umbrella contract’ which remains in existence even when the individual concerned is not working. It is in that context in particular that courts have emphasised the need to demonstrate some mutuality of obligation between the parties but, as I have indicated, all that is being done is to say that there must be something from which a contract can properly be inferred. Without some mutuality, amounting to what is sometimes called the ‘irreducible minimum of obligation’, no contract exists”.
HMRC cite the case of Clark v Oxfordshire Health Authority in their own guidance on what constitutes an overarching contract:
“I would, for my part, accept that the mutual obligations required to found a global contract of employment need not necessarily and in every case consist of obligations to provide and perform work. To take one obvious example, an obligation by the one party to accept and do work if offered and an obligation on the other party to pay a retainer during such periods as work was not offered would in my opinion, be likely to suffice. In my judgment, however, as I have already indicated, the authorities require us to hold that mutuality of obligation is required to found a global contract of employment. In the present case I can find no such mutuality subsisting during the periods when the applicant was not occupied in a ‘single engagement’. Any obligation of confidentiality binding her during such periods would have stemmed merely from previous single engagements. Apart from this, no continuing obligation whatever would have fallen on the authority during such periods.” [Paragraph 41: Sir Christopher Slade]
Therefore, provided an OAC contains the components that have been established in case law over time, a worker engaged under such a contract will be working at a series of temporary locations and will therefore be entitled to tax relief on the cost of expenses.
If the OAC attempts to create a temporary workplace or secondary site, by itself then the necessary requirements to create a temporary workplace in reality would not be in place and therefore the T&S rules would be the deciding factor whether a workplace is temporary or not.
It is highly unlikely that Agencies Travel Schemes will remain as these schemes are generally used for workers who would not satisfy the temporary workplace tests, namely they are on temp to perm or are only expecting to work on one assignment, then this option will create the desired result.
Umbrella Companies that rely only on the OAC to create a temporary workplace utilising a similar OAC to the agency Travel Scheme will also need to be satisfied that the worker is working at a temporary workplace before the worker is entitled to relief.
Umbrella Companies that simply use the OAC to create an employer and employee relationship and subsequently test whether a workplace is temporary or permanent would be unaffected by this option.
Pay Day by Pay Day models seem to have no intention in following the rules either legislatively or morally and it would probably be fair to say that they will attempt to circumvent any legislative changes, the same can be said of Hybrid models and whilst Option 2 would ultimately lead to HMRC Compliance Activity and ultimate winding up then it has been shown that they would simply Phoenix into a new company, this has been demonstrated by a recent GLA case involving two Pay Day by Pay Day Companies who despite closing down their GLA Models, stated that they would be setting up the same model in new companies for the non GLA workers. Sometimes, such companies are part of a larger group with other group companies ready to step into the shoes of the other.
It is clear that any legislative change should provide that any debt created by any amendment should be levied on the agency closest to the client, which has been shown to force them to ensure that the workers they provide to the client are paid correctly.
PSCs are unlikely to be impacted by Option 2 as they would be in the same position as an Umbrella Company, unless they use the OAC to do more than create the employer/employee relationship. However, it has long been an anomaly of the NMW regulations that a worker providing his services through a PSC is not afforded the same right to be paid at least NMW as his fellow employed colleagues.
As indicated in the discussion document, HMRC believe that PSCs are being used by some with an OAC to avoid NMW and as a result there is a significant loss to the exchequer and the workers’ rights are lost.
A suggested amendment to Part 2, Chapter 7 is attached ensuring that a workplace can’t magically be turned from a permanent to a temporary workplace by the use of an OAC, it also suggests a test to be added that ensures that the workers income is subject correctly to PAYE and that all their employment rights are protected, otherwise it becomes an agency contract with all that brings.
Question 15: Are there particular groups of people who will be significantly worse off if tax relief was restricted?
If Option 2 is applied then only the groups that it was never intended should benefit from the relaxation in the rules that we now have, because in reality they never should have had the tax relief.
Question 16: Are there examples of where this may affect cases where it is fair that tax relief should apply?
If Option 1 would result in all workers, based upon the current rules, satisfying the temporary workplace tests whether employed by an Umbrella Company or their own PSC would be unfairly denied tax relief.
Question 17: Do you think the removal of relief for travel expenses under option 1 should be extended to PSCs?
We don’t think Option 1 should be considered at all. Is it fair that a worker employed by his own company is treated differently to a worker employed through an Umbrella Company when they both are working at a temporary workplace?
Question 18: Do you have any other suggestions, including broad based T&S reform as part of the T&S review announced at Budget 2014, for how identified unfairness could be removed?
ain suggestion is that in order for an employee of a PSC to be able to claim tax relief for travel & subsistence incurred, they must be employed under a contract of employment that means they must be paid NMW for each hour worked.
This will mean that they must register for a PAYE scheme and ultimately RTI the information, which we are sure, will assist HMRC in tracking down PSCs used to shift money offshore.
Based upon some simple maths, the loss to the Exchequer of a PSC worker paying a salary below NMW could be up to £1,217.50 per company in lost National Insurance, based upon a 37.5 hour week.
There is no loss of tax as the increased profit would be subject to Corporation Tax.
Suggested Amendment to Part 2, Chapter 7 ITEPA 2003:
44 Treatment of Workers supplied by agencies
44 (1) This section applies if -
- An individual (“the worker”) personally provides services (which are not excluded services) to another person (“the client”)’
- There is a contract between –
- The client or a person connected with the client, and
- A person other than the worker, the client or a person connected with the client (“the agency”), and
- Under or in consequence of that contract –
- The service are provided, or
- The client or any person connected with the client pays, or otherwise provides consideration, for the services.
44 (2) But this section does not apply if-
- It is shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person, or
- Remuneration receivable by the worker in consequence of providing the services constitutes employment income of the worker apart from this chapter; and
- The worker is employed under a contract of employment that satisfies the following: -
- The payment of National Minimum Wage in respect of each hour worked on which Income Tax and National Insurance is accounted for correctly; and
- The payment of Holiday Pay in accordance with the Working Time Directive Act; and
- The payment of Statutory Benefits as they arise; and
- The contract of employment does not deem the offices of the agency or the workers home as their permanent workplace.
C (I to iii) should prevent any scheme that seeks to differentiate between the employment status for Income Tax purposes and general employment rights and can be extended to include all employment rights.
C (iv) should prevent Agencies and any Umbrellas that do use OAC to create a temporary workplace and / or second workplace reimbursing expense tax-free.
Publication date: 16 December 2014
Closing date for comments: 10 February 2015
Lisa Keeble, Contractor Umbrella Ltd
Paul Hughes, IPaye Ltd