HM Revenue & Customs has warned umbrella companies, employment businesses, labour providers and employers against adopting a new travel and subsistence business model.

Under the ‘pay day by pay day’ tax relief model, an employer applies income tax and National Insurance relief to the amount of expenses, which an employee has incurred, with the relief applied each pay day. The effect is that only the balance is subjected to tax and National Insurance.

However, last week HMRC issued a warning that the model does not comply with the Taxes Acts or Social Security Acts and associated regulations.

HMRC said that an employer operating such a model is not accounting for the the correct Income Tax (PAYE) due to HMRC because Income Tax is an annual tax. 

It added that the Social Security (Contributions) Regulations 2001 do not provide for a deduction from the amount of that employees earnings, where the employee meets the travelling expenses out of total income/earnings.

In May, HMRC said it was looking into another business model in which the employer pays travel and subsistence claims in cash to employees, who then make a voluntary ‘financial advice payment’ to the employer.