Umbrella Travel and Subsistence Review

Exec Summary of Employment Intermediaries Syndicate Response to HMRC Review of Travel and Subsistence Relief

12 February 2015

At Umbrella.co.uk we were a member of and part of the steering group for the FCSA led Syndicate of Employment Intermediaries and their response to the HMRC discussion document titled “Employment Intermediaries: Temporary workers – relief for travel and subsistence”.

Below is the executive summary in respect of the response to the HMRC review:

This document sets out the collective response of 36 of the largest umbrella businesses in the UK including answers to the questions posed by HM Revenue & Customs (“HMRC”) and additional information to assist HMRC and Ministers in their deliberations.  In summary, the suggested changes appear to be based on false understanding and will have a detrimental effect on the entire flexible workforce and the wider economy.  If implemented as suggested, they will not achieve the stated aims and, if anything, result in more administration and less tax yield.

The key findings are:

1.     The proposals do not adequately consider the impact of the changes on the UK economy

The flexible workforce is one of the fundamental factors behind the UK economy’s recent growth out of the recession. The proposals undermine the part which umbrella companies play. From calculations it is estimated that the contribution to the economy by the umbrella sector is £10bn-£11.5bn. This is from the 200 umbrella companies (Section 2.3) and 300,000-400,000 employees that the research estimates. The proposed changes will cause massive disruption to the flexible workforce. Umbrella employees who currently travel considerable distances each week will not undertake work which requires this kind of travel. This will damage companies, reduce the skill level and increase the cost of the “Just in Time” flexible workforce and, therefore, damage the economy as a whole.

2.     The tax yield estimated is significantly overstated

Whilst it is not clear how the £400m yield has been calculated, a number of likely consequences do not appear to have been factored into the calculations and a number of questionable preconceptions appear to have been built into the assumptions.  Further research should be undertaken into the implications of any legislative changes to travel and subsistence (“T&S”) in the sector before any changes are considered further.

3.     The behavioural response of those affected has not been adequately considered

Should HMRC’s suggested options be put into place then a significant proportion of the umbrella employees who legitimately claim T&S relief can be expected to move into other models – behaviour previously seen following the Agency Worker Regulations (“AWR”) legislation, the Managed Service Company (“MSC”) legislation and the recent Onshore legislation. These actions will decrease tax yield and increase compliance costs.

The majority of workers can be expected to adopt the Personal Service Company (“PSC”) model. This will lead to:

i)       HMRC not achieving the extra income tax on T&S

ii)     A vastly reduced visibility for HMRC of payments being made (say by 250,000 limited companies rather than 200 umbrella employers)

iii)   A reduced tax/NIC yield as workers will receive income through dividends

iv)    A time-lag of up to 21 months (if submitted on time) between the PSC receiving income and the tax filings required

v)     More workers with no employment rights

In summary, the proposals risk delivering the opposite of what HMRC, HM Treasury, Government and compliant umbrellas want.

Another large proportion – predominantly those who receive lower assignment rates – will be forced into less/non-compliant models such as the Elective Deduction Model (“EDM”) and payday. This will mean:

i)          HMRC will not receive the T&S income it believes it will

ii)         More workers will have no employment rights and/or receive less than the National Minimum Wage (“NMW”)

Far from creating a level playing field, the proposals risk doing significant harm to vulnerable workers.

It is estimated that movement into PSC and EDM models will account for 80% of the workers who move. Some others will move into agency Pay As You Earn (“PAYE”) or accept lower pay in ‘regular’ employment where they are able to find such work; with the rest moving to the ‘shadow’ economy or to unemployment (i.e. receiving unemployment benefit).

4.     The proposals ignore the benefit to workers, agencies and end clients of using umbrella employers

Most workers receive a number of benefits from contracting under the umbrella model. These include:

i)           Increased employment rights

ii)         Increased choice

iii)       Greater personal benefits e.g. insurance, mortgages.

It is down to preconceptions and misunderstandings that the positive impact of being an umbrella employee is not seen. These proposals could remove these benefits from the vast majority of employees who contract via umbrella businesses

5.     It is the workers who will suffer

Any workers who wish to remain under the umbrella model due to the additional benefit of being an umbrella employee will bear the cost of their travel rather than end-users raising the assignment rate to make up for the removal of T&S relief.  As we have seen from the introduction of false self-employment legislation, pay levels are unlikely to rise to compensate for this reduction in net pay.

6.     HMRC’s aims can be better achieved by working with the sector

Further investigation is required into the impact of any legislation and, should HMRC still believe intervention is necessary, there are a number of better and easier to implement alternatives which build on existing self-regulation and will lead to increased compliance. This group would welcome the opportunity to help HMRC achieve its stated aims whilst avoiding any unintended consequences