Could travel & subsistence review threaten umbrella model?
26 March 2014
A government review of travel & subsistence (T&S) rules could “massively reduce” the scope of umbrella companies to offer tax and National Insurance Contributions (NICs) savings via T&S schemes.
Wed, 26 Mar 2014 | By Colin Cottell
A government review of travel & subsistence (T&S) rules could “massively reduce” the scope of umbrella companies to offer tax and National Insurance Contributions (NICs) savings via T&S schemes.
This is according to a lawyer specialising in the recruitment sector. Others in the sector welcomed the government’s intention to simplify the rules.
In January, the Office of Tax Simplification recommended in its second ‘Review of employee benefits and expenses’ report that T&S should be limited to only 30% of a worker’s employment assessed on a rolling 12-month basis. Beyond that it said a workplace would not be regarded as temporary, with the result that workers on that site would not be able to claim T&S expenses.
Recruitment industry experts familiar with the rules governing T&S say they expect the review, announced at the same time as the recent Budget [19 March] and due to take place over the summer, to focus on what does and does not constitute a permanent workplace.
And according to Frances Lewis, a consultant at law firm Osborne Clarke, should the review decide to back the ‘30% test’, umbrella companies and umbrella workers are among those most likely to be most affected.
“If this goes ahead, this will massively reduce the scope umbrella companies have to offer tax/NICs savings via T&S schemes,” says Lewis. Lewis says that those umbrella companies most likely to be affected are those that engage workers on long-term contracts, who will no longer be entitled to claim T&S expenses.
Many umbrella companies highlight the ability of workers to claim expenses for T&S, thereby reducing their tax and NICs and boosting take-home pay as one of their key selling points. However, there have been persistent concerns that not all the savings are passed on to the workers, but are shared between the umbrella company and recruitment agencies.
Mark Groom, an employment tax partner at Deloitte, tells Recruiter that the 30% rule “will make things worse” for some workers, as it could mean all their places of work being deemed permanent, leaving them unable to claim any T&S expenses at all.
However, Derek Kelly, managing director of umbrella provider Parasol, tells Recruiter that the OTS proposals “are not the end of umbrellas”. “The OTS recommendations are a positive step because the system is massively out of date,” he says.
Currently, the OTS says many employers use the ‘40% test’ contained in HMRC guidance to determine if a place workers attend is a permanent workplace.
Cordant Group chief executive officer Phillip Ullmann welcomes the government’s intention to simplify the rules. Ullmann tells Recruiter: “As long as it’s a level playing field and everyone knows the rules – that is the key here. Where the precise dividing line [between temporary permanent workplaces] is placed is, I think for the Revenue to decided, but clarification and simplification is beneficial.”
The OTS also recommended changes to the 24-month rule covering temporary workplaces. At the moment, T&S expenses can be deducted for up to 24 months, but this is dependent on the intended length of the assignment rather than its final length. “If someone spends 12 months in a temporary workplace they can get tax relief [on their tax deductible expenses] but if this is extended by a further 18 months that is 30 months, which takes them over the 24-month limit, so they lose tax relief for those final 18 months,” Groom explains.
However, in addition to the time limit rule, Groom says another rule the '40% test ' is applied by HMRC to run alongside the 24-month rule to determine whether a workplace is temporary or permanent.
Under the 40% test, a workplace is deemed as permanent if a worker spends more than 40% of his or her time there over a period of more than 24 months.
However, Groom explains that up to 24 months a worker can spend up to 100% of their time in a workplace for it still to be deemed a temporary workplace.
However, he explains "this rule only applies if you are going to a workplace either for a temporary purpose or for a limited duration." So for example, even if a worker spends only 20% of their time in a particular workplace, if this is for an unlimited period or the worker is not working there for a temporary purpose, HMRC doesn't regard it as a temporary workplace.
Although this percentage derives from HMRC guidance, it is often used incorrectly by employers, says the OTS, and as a result, OTS recommends that workers on a temporary assignment are allowed to deduct T&S expenses for the first 24 months regardless of the intended length of the assignment.
Ullmann says this recommendation is “a positive step”. “The current rules are not easy to understand, and therefore if they standardise them at the first 24 months I think that is beneficial.”
However, Ullmann says he is not expecting a radical overhaul of T&S rules. “They are essentially saying that the current rules work... they are not saying that T&S is going, so I think this is very positive.
“They will create a level playing field, and clarification will suit everyone. None of these changes are fundamental; they are essentially saying the rules work as they stand, they are essentially refining and simplifying some key areas, which I support wholly.”
Matthew Brown, MD of giant Group, tells Recruiter: “We welcome a review of the existing travel & subsistence rules in order to simplify them. This is an important relief for temporary workers who incur costs travelling to different temporary workplaces throughout their employment, however the rules are complex and can be interpreted and applied differently. Having all employers apply them in a uniform way would be good for all parties.”
A Treasury spokesperson tells Recruiter: “We recognise that the current rules do not reflect modern business practices and will be reviewing them to ensure that the UK has rules fit for the 21st century. Building on the work of the OTS, the government is intending to undertake a wide review, looking at the taxation of travel and subsistence and will work with interested stakeholders to do so.”
The spokesperson adds that in addition to the review, the government will be calling for “evidence on remuneration more generally and will seek both meetings with and submissions from interested parties as part of these. A timetable for the review has not yet been set out however updates on the review will be provided at fiscal events”.
However, Parasol’s Kelly says he doesn’t expect any changes in legislation “until April 2015 at the earliest”.
This is according to a lawyer specialising in the recruitment sector. Others in the sector welcomed the government’s intention to simplify the rules.
In January, the Office of Tax Simplification recommended in its second ‘Review of employee benefits and expenses’ report that T&S should be limited to only 30% of a worker’s employment assessed on a rolling 12-month basis. Beyond that it said a workplace would not be regarded as temporary, with the result that workers on that site would not be able to claim T&S expenses.
Recruitment industry experts familiar with the rules governing T&S say they expect the review, announced at the same time as the recent Budget [19 March] and due to take place over the summer, to focus on what does and does not constitute a permanent workplace.
And according to Frances Lewis, a consultant at law firm Osborne Clarke, should the review decide to back the ‘30% test’, umbrella companies and umbrella workers are among those most likely to be most affected.
“If this goes ahead, this will massively reduce the scope umbrella companies have to offer tax/NICs savings via T&S schemes,” says Lewis. Lewis says that those umbrella companies most likely to be affected are those that engage workers on long-term contracts, who will no longer be entitled to claim T&S expenses.
Many umbrella companies highlight the ability of workers to claim expenses for T&S, thereby reducing their tax and NICs and boosting take-home pay as one of their key selling points. However, there have been persistent concerns that not all the savings are passed on to the workers, but are shared between the umbrella company and recruitment agencies.
Mark Groom, an employment tax partner at Deloitte, tells Recruiter that the 30% rule “will make things worse” for some workers, as it could mean all their places of work being deemed permanent, leaving them unable to claim any T&S expenses at all.
However, Derek Kelly, managing director of umbrella provider Parasol, tells Recruiter that the OTS proposals “are not the end of umbrellas”. “The OTS recommendations are a positive step because the system is massively out of date,” he says.
Currently, the OTS says many employers use the ‘40% test’ contained in HMRC guidance to determine if a place workers attend is a permanent workplace.
Cordant Group chief executive officer Phillip Ullmann welcomes the government’s intention to simplify the rules. Ullmann tells Recruiter: “As long as it’s a level playing field and everyone knows the rules – that is the key here. Where the precise dividing line [between temporary permanent workplaces] is placed is, I think for the Revenue to decided, but clarification and simplification is beneficial.”
The OTS also recommended changes to the 24-month rule covering temporary workplaces. At the moment, T&S expenses can be deducted for up to 24 months, but this is dependent on the intended length of the assignment rather than its final length. “If someone spends 12 months in a temporary workplace they can get tax relief [on their tax deductible expenses] but if this is extended by a further 18 months that is 30 months, which takes them over the 24-month limit, so they lose tax relief for those final 18 months,” Groom explains.
However, in addition to the time limit rule, Groom says another rule the '40% test ' is applied by HMRC to run alongside the 24-month rule to determine whether a workplace is temporary or permanent.
Under the 40% test, a workplace is deemed as permanent if a worker spends more than 40% of his or her time there over a period of more than 24 months.
However, Groom explains that up to 24 months a worker can spend up to 100% of their time in a workplace for it still to be deemed a temporary workplace.
However, he explains "this rule only applies if you are going to a workplace either for a temporary purpose or for a limited duration." So for example, even if a worker spends only 20% of their time in a particular workplace, if this is for an unlimited period or the worker is not working there for a temporary purpose, HMRC doesn't regard it as a temporary workplace.
Although this percentage derives from HMRC guidance, it is often used incorrectly by employers, says the OTS, and as a result, OTS recommends that workers on a temporary assignment are allowed to deduct T&S expenses for the first 24 months regardless of the intended length of the assignment.
Ullmann says this recommendation is “a positive step”. “The current rules are not easy to understand, and therefore if they standardise them at the first 24 months I think that is beneficial.”
However, Ullmann says he is not expecting a radical overhaul of T&S rules. “They are essentially saying that the current rules work... they are not saying that T&S is going, so I think this is very positive.
“They will create a level playing field, and clarification will suit everyone. None of these changes are fundamental; they are essentially saying the rules work as they stand, they are essentially refining and simplifying some key areas, which I support wholly.”
Matthew Brown, MD of giant Group, tells Recruiter: “We welcome a review of the existing travel & subsistence rules in order to simplify them. This is an important relief for temporary workers who incur costs travelling to different temporary workplaces throughout their employment, however the rules are complex and can be interpreted and applied differently. Having all employers apply them in a uniform way would be good for all parties.”
A Treasury spokesperson tells Recruiter: “We recognise that the current rules do not reflect modern business practices and will be reviewing them to ensure that the UK has rules fit for the 21st century. Building on the work of the OTS, the government is intending to undertake a wide review, looking at the taxation of travel and subsistence and will work with interested stakeholders to do so.”
The spokesperson adds that in addition to the review, the government will be calling for “evidence on remuneration more generally and will seek both meetings with and submissions from interested parties as part of these. A timetable for the review has not yet been set out however updates on the review will be provided at fiscal events”.
However, Parasol’s Kelly says he doesn’t expect any changes in legislation “until April 2015 at the earliest”.
