I should have mentioned a tax case that I think has some significance that has been won by HMRC in the last week or so.
The case was brought against Reeds, the temporary employment agency and found that the company was liable to pay £158 million of extra income tax and national insurance. The basis for the charge is that expenses paid by the company to employees for travel and other expenses they supposedly incurred in the course of their employment were found not to be incurred for that purpose but were instead taxable benefits in kind and so were subject to tax.
I do not propose to make this a discussion of the technical merits of the case, which appears to have revolved mainly around whether or not the Reed employees had an employment or a series of temporary engagements (the latter being ruled to be the case, meaning there was not one work place but many so that travel to each was not tax allowable as had been claimed) and instead concentrate on the broader issue here.
The most superficial of reviews of the internet will show that despite various changes in tax rules over the intervening years the role of so called umbrella companies in the temp market remains significant, and most will advertise that they can significantly reduce a person's effective tax rate by allowing the reimbursement of expenses as part of pay, moving them outside the scope of tax, it is claimed.
The Reeds case may obviously impact on this claim: I am not making prediction on that issue. What I am saying is that it seems that this whole area remains out of control. Umbrella companies are undoubtedly engaged as intermediaries by some employers to reduce or remove their obligations to employees e.g. to make pension contributions or offer security of contract.
The companies themselves promote an environment in which tax abuse appears endemic.
Both situations are abusive of the intent of fair tax and labour market regulation. I have no answer at present; I will be candid about that. But I do think it an issue needing to be addressed.
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Umbrella companies are a threat to workers as well as to HMRC. Oftey the scam is that they effectively transfer the cost of running the payroll to the worker by making an administration deduction for that purpose. For the lowest paid workers this could mean that they get less than minimum wage, something which HMRC has insufficient resources to check.
The underlying problem with Reed is a mismatch between the tax rules on travel costs and the expectations of some taxpayers on what they should be taxed on.
Ordinary commuting is one thing, but I can see some merit in an argument that if you make your living as a temp then you can’t realistically choose where to live based on where you work, as a permanent employee can, so your costs of getting to work are related more to work and less to home life than is the case for the permanent employee.
On the other hand, given that jobs are scarce, you tend to move jobs more, and moving house is not a trivial matter, I think there would be merit in a permanent employee saying that they have the same problems so the temp should just put up with it.
The fairest thing would be to allow commuting costs as a deduction, but that would get horribly complicated under PAYE; absent that, we need rules about what travel is deductible that are clear, and that take modern work patterns into account.
Moving beyond travel, umbrella companies generally exist largely because of the Class 1 / Class 4 NI divide. That causes too many headaches and needs fixing anyway (and not simply by adopting HMRC’s preferred approach of deeming people to be employees for tax purposes when they’re not for other purposes).
how much would tax relief for commuting cost, and what other taxes should be increased to fund this cost?
I have no idea how much it would cost – I imagine it would be a fairly substantial sum, though. I aso have no opinions on how the cost should be paid for: that would be a policy matter and I try to keep out of those 🙂
However, I do expect that it would be very complicated to run a system of deductions for ordinary commuting, and it would be very open to abuse, so although on one level it would be fair to have such a deduction (it is a pretty close fit for “wholly, exclusively and necessarily”, for one thing) I think that overall it’s probably better not to have one. Sometimes one has to compromise between fairness, simplicity, and robustness.
Having said that, we still need clear and simple rules about non-commuting travel. Actually, I’ll rephrase that. We have clear and simple rules: what we need is equally clear and simple rules that take better account of the unclear and complex situations that commonly occur in real life.
The biggest group of temporary workers coming in from outside of the EU, under the points-based system is ‘intra-corporate transferees’ (Tier 2), so employees of companies that are established cross-border, not usually umbrella agencies – but could be? Mostly banks etc.
This is an existing WTO Mode 4 (movement of temporary workers across borders) GATS commitment from the WTO Uruguay Round 1995.
The commitment is for ‘managers’ and ‘specialists’.
It is being used mostly to bring in IT workers from India – not ‘managers’ or ‘specialists’.
ICTs can be and are paid the minimum wage (less until questions were asked in parliament) made up to a low industry norm with tax free expenses – even though expenses should be in addition to wages.
If workers being paid an overall remuneration including tax free expenses at the low end of a national average for the work come to higher wage London, then this wage is even lower by comparison.
This is both a tax dodge and overall cheap labour
It is also very lucrative for the companies that can utilise this ‘trade’ provision, translated into the tier system, to then hire out ‘ICTs’ on a day rate to other companies who will pay a premium for avoiding employer obligations.
Who gains, who loses?
The firms that can utilise this measure have cheap labour, and a good earner on the side. Any hiring company has convenience workers without any employer obligations. The temporary workers still take much more home than they would earn at home.
But the tax payer loses, and most of all the displaced workers who have invested in their own skills development only to be in competition with cheap labour. (Note the slump in university computing degrees).