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Markel Tax

01 Apr 2016

Travel and subsistence expenses

From 6 April 2016 changes to legislation removed the right of employees who are engaged through third parties and are subject to supervision, direction or control to claim travel and subsistence expenses.  There is also an additional risk where they are not subject to supervision, direction or control from Section 289 FA 2015 which created new legislation restricting the use of salary sacrifice in respect of travel and subsistence expenses.  Such an arrangement is defined in the legislation as:

“Relevant salary sacrifice arrangements”, in relation to an employee to whom an amount is paid or reimbursed in respect of expenses, means arrangements (whenever made, whether before or after the employment began) under which—

(a) the employee gives up the right to receive an amount of general earnings or specific employment income in return for the payment or reimbursement, or

(b) the amount of other general earnings or specific employment income received by the employee depends on the amount of the payment or reimbursement”.  

It is clear therefore that where an employee gives up a right to part of their salary in exchange for reimbursement of tax free expenses then this arrangement would be caught by the legislation.  This is not new as a principle, HMRC have always challenged improper salary sacrifice arrangements, and it is widely accepted that a salary sacrifice arrangement such that an employee is giving up part of their salary in exchange for expenses is not a genuine and true salary sacrifice agreement (as the employee is not receiving any kind of tangible benefit in exchange for the salary he has given up – in fact expenses are not a “benefit” in true tax terms if they are eligible to be reimbursed tax free).

There may be certain situations where practices and provision of information to employees may create or imply an arrangement which would fall within the legislative provisions.  The most common two circumstances where this could occur are:

Agency practices

Agencies should be careful as to how they provide information to individuals where those individuals will become employees of an umbrella company.  Where, for example, an agency consultant provides information to the work seeker along the lines of “your rate of pay is £15 per hour but we pay you through Umbrella Company limited”.  The Agency has stepped through the contract between the umbrella company and the agency and impliedly established an entitlement to the whole £15 per hour by the work seeker.

Where this happens and an individual can establish an entitlement to the whole amount of the monies paid by the agency, then the individual is entitled, under worker/employee rights, to gross pay of £15 per hour for every hour worked – therefore if any monies are deducted from this £15, or any part of this £15 is paid as anything other than taxable pay, the agency has automatically entered into a pseudo salary sacrifice arrangement which falls foul of the legislation (any contracts entered into subsequent to this would be challengeable as the entitlement was created prior to employment or commencement of services).

It is therefore fundamentally important that agencies fully understand how the contractual chain must operate, and honour these contracts.  Care must be taken when agencies are dealing with individuals and should present information along the lines of “we subcontract the provision of construction services to Umbrella Company limited.  The job rate we agree with Umbrella Company limited is £15 per hour, but you would need to discuss your pay with Umbrella Company limited as this £15 is not the agreed rate of pay for you”.

Pay slip information

The other common pitfall involves the way in which umbrella companies present information to their employees on their payslip.  An umbrella employee payslip should contain no more and no less than any other payslip for any other employee.  Typically in an umbrella company scenario umbrella companies like to provide the employees with additional information such as the rate agreed with the agency, employers NI and company profit margin – there is no issue in providing this information per se, however how the information is provided can prove problematic.

The only information which should be on a “payslip” should be the employee’s taxable pay, expenses and employee tax and NI.  If any other information is to be provided it must be provided separate to the “payslip” element.  The reason being that if employers NI, agency rate, margin etc is provided on one combined page under the heading of “payslip”, then by virtue of providing all the information on an employee payslip it has impliedly established that all the monies identified flow from the individuals employment.

As such the employee could reasonably construe that the agency rate is his employee entitlement and all monies subtracted from this are unlawful deductions/unlawful salary sacrifice – which would bring it squarely within the legislation.

It must be made clear to the employees that the information such as Agency rate, Employers NI etc are provided for information purposes only and are not provided as part of their employee entitlement (as their employee entitlements are contained solely and completely within their employment contract).

As part of the employment contract it should specifically provide the employee is entitled, and guaranteed, at least National Minimum Wage (NMW) for every hour worked by the employee.

Where that contract is properly drafted and observed in practice, as a matter of law, the employee’s entitlement to salary is contained wholly and solely within the contract of employment between the umbrella company and the employee.  This contract, and this contract alone, provides the employee with their entitlement to salary (and all other employee benefits).  As such the employee always has a guaranteed set salary, and as a matter of law their only entitlement to pay is NMW plus Holiday Pay (HP) for every hour worked – they have no entitlement, in law, to any other monies from the umbrella company whatsoever.

With these contracts in place there is no question of an employee entering into an agreement to give up any part of their salary (as the umbrella company is never going to pay less than the guaranteed payment of NMW plus HP).  Effectively the umbrella company operates individual profit centre for each employee, which operates in exactly the same way as any company with fee generating consultants who receive bonuses.

It is our opinion that an umbrella company operating under the correct contracts, and adopting the correct practices does not automatically fall within the scope of the legislation.  As highlighted above there may be certain addition practices outside of the contracts which could damage, or bring into question the validity of, the contractual chain and care must be taken by both the umbrella company and Agency to ensure contracts are upheld and vigorously followed.

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