In the last two years HM Revenue and Customs (HMRC) have seen a growth in arrangements which are variously described as ‘Travel and Subsistence Schemes’ or ‘Mobile Worker Schemes’. These schemes are operated by many businesses involved in the supply of temporary workers to end users: Employment Businesses and umbrella companies.

The labour supply businesses seek to obtain a tax and National Insurance advantage by the creation of a purported overarching employment contract which is intended to enable temporary workers who would not otherwise be entitled to tax relief on travel and subsistence expenses to gain such tax relief.

In the last two years HM Revenue and Customs (HMRC) have seen a growth in arrangements which are variously described as ‘Travel and Subsistence Schemes’ or ‘Mobile Worker Schemes’. These schemes are operated by many businesses involved in the supply of temporary workers to end users: Employment Businesses and umbrella companies. The labour supply businesses seek to obtain a tax and National Insurance advantage by the creation of a purported overarching employment contract which is intended to enable temporary workers who would not otherwise be entitled to tax relief on travel and subsistence expenses to gain such tax relief.

These schemes often involve the use of salary sacrifice arrangements and rely for their effectiveness on the fact that HMRC have issued a dispensation in accordance with section 65 Income Tax (Earnings and Pensions) Act 2003.

In many cases such schemes are marketed to workers as representing a tax and National Insurance saving for the worker. However, the major saving is not to the worker, rather to the party who would bear the higher employer’s National Insurance contributions costs if it were not for the arrangement.

Following responses to the July 2008 consultation ‘Tax relief for travel expenses: temporary workers and overarching employment contracts‘, HMRC commenced compliance activity to identify and take action against those Employment Businesses and umbrella companies which are operating in contravention of tax, National Insurance or national minimum wage legislation.

Current compliance activity has identified a number of concerns that are the subject of more detailed, ongoing investigation. These include:

• Potentially ineffective overarching employment contracts
• Dispensations which are invalid, or which have been wrongly applied
• Not complying with the terms of the dispensation
• “Expense payments” made tax-free without that level of expense, or in many cases any expense, having been incurred
• Potential illegal deductions from workers’ pay
• Ineffective and sometimes unlawful management processes; and
• Breaches of national minimum wage

HMRC are working with other Government Departments, including the Department for Business Innovation & Skills, and Authorities, particularly the Gangmasters Licensing Authority, to identify businesses acting in contravention of legislation and will penalise breaches of the law as they are identified. In addition, HMRC are also working with end users of temporary labour to raise their awareness of the consequences of sourcing their temporary workers from businesses which act in contravention of the law.

HMRC are concerned that many lower paid workers being paid through such schemes do not understand the arrangements and in many cases are given little choice as to whether or not they are paid through such schemes. There are also concerns about low paid workers in such schemes opting out of the Conduct of Employment Agencies and Employment Businesses Regulations 2003 without fully understanding the implications of what the opt-out means.

End user businesses which use temporary workers paid though Employment Businesses and/or umbrella companies which do not fully comply with their statutory obligations, clearly run a risk of damage to their reputation and their business if HMRC takes action.

HMRC will continue to investigate and challenge non-compliant Employment Businesses and umbrella companies and will report to ministers in due course on the outcome of that action and the extent of issues being discovered. Ministers will then be able to consider the extent to which compliance action is able to address the undesirable effects of these schemes and whether further measures are required.

HMRC