Draft 2016 travel and subsistence legislation – Briefing 2: Exactly how are umbrella models affected and what will happen to umbrella workers?

Written on 14 Dec 2015

On 11 December 2015 we issued a briefing looking at the key points and likely problems with the draft travel and subsistence legislation released on 9 December 2015. That was the first in a series of briefings about the draft legislation. 

In this second of four briefings we comment on how umbrella models will be affected and what will happen to umbrella workers and workers “employed” by other labour suppliers.

The key issues for umbrella arrangements 

Umbrella companies and other employment intermediaries will, as a general rule, no longer be able to pay relevant travel and subsistence expenses (“T&S”) tax-free for travel from home to temporary workplaces from 6 April 2016. The detail is as follows:

  • Umbrellas and staffing companies who have employed workers and paid T&S free of tax and NICs (together “tax”) will, from 6 April 2016, not be able to do so unless they can show that no one exercises supervision, direction or control (“SDC”), or has the right of SDC, over how the workers do their jobs (which in practice will be very difficult for them to show when the workers are working under contracts of employment).
  • If they do pay T&S tax free, the “employer” (whether umbrella or staffing company) will be liable for tax and their directors may be personally liable.
  • There is a defence which will, in our view, only apply very rarely: where the “employer” relies on a hirer’s “fraudulent document” evidencing that there is no SDC, the hirer will be liable for the relevant tax. We doubt many hirers will be found to have issued fraudulent documents – a document will really only satisfy this test if it can be shown as having been intended to deceive an entirely innocent supplier.
  • There is no tax debt transfer to hirers or staffing companies higher up the chain. Many more established staffing companies will worry that they will therefore be undercut by cynical “here today, gone tomorrow” competitors who seduce hirers with low charge rates (which they achieve by flagrantly disregarding the new legislation, knowing that the hirers won’t care).
  • Where an engagement with a particular hirer involves more than one workplace then T&S relating to those workplaces (other than any deemed to be the permanent workplace) can be paid tax free. (“Engagement” is a vague term and how it will be interpreted will be a matter for all in the supply chain to consider). Examples are given in the papers published last week by HMRC.
  • Most umbrella companies will need to substantially change their business models to stay in business after April 2016. We are aware that many have already started planning this.
  • Employed models, including via umbrellas, may still have some attractions notwithstanding the loss of T&S. A narrow range of roles may involve multiple workplaces within each engagement and T&S may still be payable tax free to relevant workers (though this will need to be managed very carefully). Umbrella arrangements may continue in one shape or another for a broader population of umbrella or “employed” workers such as where the relevant staffing companies do not want to run payroll, where the hirer or staffing company wants AWR issues to be mitigated, where hirers just want someone else to be the employer of record, where the workers in fact never claim T&S, and where the relevant contract workers just do not want the bother of running PSCs. However, most umbrellas currently make most of their money from T&S related offerings and so users of umbrella and other employed models going forward may find that the cost of the post-apocalyptic umbrella service has to go up to cover the umbrella’s costs.
  • Our November briefing sets out some likely options for umbrella companies.
  • One thing suppliers (and umbrellas) can definitely start planning is the soft-landing for workers whose take home pay will be reduced after April. If you leave things to the last moment you may find individuals taking a relatively unexpected pay cut mid-assignment and that could trigger litigation under the Employment Rights Act and (possibly) equal pay claims under AWR (the loss of tax free T&S may highlight differentials in “pay” which were previously masked). There are things you can do now to reduce this risk. 

What next? 

Later this week we will issue further briefings looking at:

  • Whether there will be a surge of PSC contracting and, if so, what risks may that involve.
  • The impact on outsourcing arrangements and other aspects of the legislation.

On 20 January we are running a seminar that will look at the future for flexible workforces, and why staffing and umbrella companies need to act now to ensure that their offerings keep pace with legislative change and offer commercially sensible arrangements. Find out more >

In the meantime we are offering fixed price consultations for any business affected by the changes. In these consultations we will:

  • Review your current arrangements and types of worker/types of engager.
  • Review other legal and commercial developments affecting you at the moment.
  • Discuss the best options for your business taking all factors into account, followed up with a written report. 

We will look at the detail of the proposals and their impact on the various options at which companies have been looking.

  • Usage of PSC models: what is safe going forward?
  • What umbrella arrangements may still work?
  • How can outsourcing arrangements operate outside the new regime?
  • How can direct engagement models offer a viable and profitable alternative?
  • How can you reduce risk of claims by disgruntled workers if there is no option other than to push down take home pay rates?

Our advice is confidential and protected by legal privilege. Generally speaking, only solicitors registered by the Solicitors Regulation Authority and practicing barristers benefit from legal privilege.