Response to HMRC Questions from All Umbrella Companies Are Equal on the Employment Intermediaries Consultation: Temporary workers – relief for travel and subsistence expenses.

Autumn Statement 2014 announced that the government would review the use of overarching contracts of employment (OAC) by employment intermediaries in the temporary labour market to take advantage of the rules for travel and subsistence expenses. These arrangements mean that some people are able to benefit from tax relief on home to work travel expenses that is not generally available to others. This can enable intermediaries to reduce the gross taxable pay of their workers at the expense of the general taxpayer. The cost to the Exchequer from these practices is substantial, amounting to around £400m a year from umbrella companies alone and we know that other employment intermediaries use similar OACs, although the extent to which they are used to confer employment rights as opposed to solely being a mechanism to avoid tax is unclear.

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.

AUCAE Response

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.

Hybrid Models
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.