Contractors' Questions: What’s an overarching contract of employment?

Contractor’s Question: I’m dipping my toe into IT contracting so have this afternoon signed-up to an umbrella company, but haven’t received much information from it as to what’s involved or what I can expect of them. One thing in particular is concerning me - as an independent contractor, do I really need to have a contract of employment with them, and why do umbrellas have to operate such a contract which is overarching?

Expert’s Answer: The short answer to why umbrella companies have to operate an over-arching contract of Employment is, basically, because the taxman says that umbrellas have to!

The reasons behind it surround what can and cannot be considered a Contract of Employment and what constitutes a temporary workplace. If an umbrella doesn’t have an overarching contract of employment in place they cannot allow tax relief on travel and subsistence expenses.

You should not be alarmed as an overarching contract gives continuity. Although you will be a  contractor, you will effectively become a permanent employee of the umbrella company and therefore each assignment you work on will be viewed as being a temporary workplace.

Remember , if you are allowed tax relief on travel costs which you should NOT have been entitled to, HM Revenue & Customs are within their rights to demand repayment. If you are a higher-rate tax payer this will be 40% of the amount claimed. The cost of a train ticket may be around £400 per month – if you gained tax relief on this amount that you weren’t entitled to, you would owe HMRC £1920.00!

How to know if your contract of employment is overarching

  1. In order for a contract to be considered overarching there must be mutuality of obligation over the duration of the employment, even in the gaps between assignments.

    HMRC believes that the correct legal position is set out in the case Clark v Oxfordshire Health Authority, during which Sir Christopher Slade said:

    “I would, for my part, accept that the mutual obligations required to found a global contract of employment need not necessarily and in every case consist of obligations to provide and perform work. To take one obvious example, an obligation by the one party to accept and do work if offered and an obligation on the other party to pay a retainer during such periods as work was not offered would in my opinion, be likely to suffice.”

    Therefore, if your contract does NOT state that you will be entitled to a regular salary during the course of your employment, and not just when you are on assignment, it will NOT be considered as overarching, and you will have NO entitlement to tax relief on expenses.

  1. There must be a guaranteed number of hours work offered in any 12 month period. HMRC accept that 336 hours is acceptable which equates to one working day per week. However, in a recent update to their guidance HMRC stated that the inclusion of such a clause in a contract will not, on its own, be enough to make the contract overarching; there must be mutual obligations in the gaps between assignments (see point 1, above).
  1. The contract must contain a provision for holiday pay as workers have a right to paid leave under the Working Time Regulations. However, holiday pay will not be a consideration in determining whether or not there is an obligation on the part of the employer in the gaps between assignments. Holiday pay must also be calculated on the basis that the employment is permanent and not on an assignment by assignment basis.

Final recommendations

When you become an employee of an umbrella company you should see, sign and return a Contract of Employment. Before you sign, check that the contract contains all of the above conditions, if it doesn’t your umbrella company is not compliant with HMRC requirements and you will have no entitlement to tax relief on travel and subsistence expenses .

The expert was Lisa Keeble, managing director of Contractor Umbrella.

Friday 4th October 2013