Exchequer Solutions Ltd and its £11million tax bill: are there implications for contractors and providers?
Headlines that umbrella companies and the umbrella company market as a whole could do without just keep coming at the moment.
And adding to that barrage is the news that Exchequer Solutions Ltd (ESL) faces an £11million tax bill, after the company lost to HMRC at the First-Tier Tribunal.
The case of ESL v HMRC specifically focuses on tax years prior to 2016 when the rules around overarching employment practices changed.
However, there are a number of key points that remain valid today -- in 2022 -- that all umbrella providers would be wise to note to ensure that they are operating compliantly and in line with an ever-changing legislative landscape, writes Crawford Temple, CEO of Professional Passport, the UK’s largest independent assessor of payment intermediary compliance.
Overarching employment contracts
For Exchequer Solutions Ltd, the case hinged primarily on whether an overarching employment relationship was in place.
Overarching employment contracts were a critical component of an umbrella company’s compliance in relation to their expenses policies as, when operated correctly pre-2016, it allowed each workplace to be assessed for tax purposes as a temporary place of work and therefore allowed ‘commute’ travel and subsistence expenses to be claimed, in relation to this temporary workplace.
For an overarching employment contract to be effective, all the correct terms within the contract must be present to create the required level of mutuality of obligation in relation to the periods between assignments (which in turn creates the overarching employer-employee relationship); and must also be supported by the correct operational processes and procedures. The contractual terms alone may not be enough to create overarching employment and may be undermined if they conflict with what actually happens in practice.
If the contract states that you as a provider will do something, you must be able to demonstrate that you do actually do it!
The common areas that our organisation saw providers (in the relevant tax years of the ESL case) falling down on, specifically were:
1. Guaranteed hours of work
HMRC issued guidelines that the minimum guaranteed hours required to create sufficient mutuality of obligation for them to accept a contract as ‘overarching’ was 336 hours per annum. If this was missing from a contract, a provider would have an uphill, and expensive, battle to prove the overarching nature of that contract.
Merely having the obligation in the contract may not be sufficient. Lack of demonstrating active management of this obligation could undermine its value in the contract, and as a provider, you should be able to demonstrate that you are managing and measuring this and (if a shortfall is found) making a payment to bring the annual total up to the 336 hours.
2. Assistance to find future work
Another common issue we found at the time that where the contract states that while the provider cannot always guarantee that work will be available, they will take steps to assist their employees to find work. Once again, having a demonstrable process for this is critical. And, in the case of ESL v HMRC, judge Robin Vos made clear that simply referring a worker back to an agency does not suffice.
(N.B. To help workers, our organisation created an unbranded ‘white labelled’ job site for providers to embed into their own portals. With 15,000 jobs approximately usually available, this represents a real, demonstrable, way of being seen to actually assist employees in finding new roles.)
3. Intention to carry out future engagements
Assuming all the correct contractual terms are in place and fully supported by the correct procedures, then the last piece of the jigsaw is for the worker to confirm that they have the intention to carry out multiple assignments while under the overarching employment of the umbrella.
This is a critical part of being able to assess each workplace for tax purposes as ‘temporary.’ If the worker did not have this intention, and only intended to carry out a single assignment during the employment, then that workplace would be deemed for tax purposes to be ‘permanent.’
This confirmation was usually addressed through a declaration on each expenses claim form, with the worker confirming this intention as part of the claiming process.
Supervision, Direction or Control
In the ESL case, with regards to the tax year 2016/17, this seems to relate to changes that were announced in the Finance Bill of 2015, which became the Finance Act of 2015, which took effect from April 2016.
The rules changed in 2016 when we saw the introduction of a Supervision, Direction or Control (‘SDC’) test. Where a worker was under SDC then each assignment would be treated as a separate engagement for tax purposes -- in simple terms, a series of permanent workplaces regardless of the contractual terms in place.
Where umbrella providers are assessing workers as outside SDC and utilising an overarching employment contract, they rely on this to create a series of temporary workplaces which allows expenses, albeit in most cases just mileage expenses as a result of further changes announced in 2015 that also came into effect in 2016. Where this is the case, all the salient points of operating a compliant umbrella with an overarching contract, as noted above, are critical.
An upending of how umbrella companies operated
In summary, these revisions upended the application of the expenses regime significantly for umbrella providers. The revisions removed dispensations that had (up till then) been in place, meaning that umbrellas that had previously held a dispensation were subsequently required to change their expenses policies and practices. The rule-changes also included a new test of ‘Relevant Salary Sacrifice’ which prevented many expenses from being claimed where they were reimbursed from general earnings.
There are some exceptions within the rules, and the one that is meaningful for umbrella providers is that the expenses regime still allows reimbursement of statutory Approved Mileage Allowance Payments (AMAP) mileage expenses -- when travelling to and from a temporary place of work. Therefore, you today see many umbrella providers operating ‘mileage-only’ expenses policies, as all other allowable claims must be claimed by their workers via HMRC form P87, or through their own individual self-assessment tax return.
Optional Remuneration Arrangements
There is a further layer of complexity added to this with the introduction of the Optional Remuneration Arrangements (‘OpRA’) that came in 2017. This change prevents workers from giving up any right of pay for tax-free benefits. In the case of umbrella companies, this threatened the legitimacy of the mileage expenses-only model.
For an umbrella to continue operating a mileage expenses policy, the umbrella needed to change how they defined pay for their workers within their employment contracts -- and we still see providers today that have failed to address this change but continue to pay such expenses.
Some providers operate a ‘fixed expenses pot’ process. This was originally designed by our organisation and agreed with HMRC.
The taxman, who could be moving to agency-reimbursed expenses next
But despite agreeing to the process, the Revenue had very specific requirements that had to be met for it to work. While on paper it provided a way to simplify many of the rules around workers claiming expenses, the actual application in the real world proved more difficult. And there were risks of workers losing money as a result.
For that reason, we no longer have companies accredited by us operating this process. There are some companies that we see still operating this, but questions remain as to whether they are meeting the specific requirements of HMRC for it to be seen as ‘compliant.’
In the ESL case, one area which does not seem to have been looked at is agency-reimbursed expenses. It is worth keeping in mind -- we are seeing many providers not operating a correct policy in this area. So much so, that agency-reimbursed expenses could very well lead to future challenges by HMRC.
ESL case: impact on workers
So what does all this mean for contractors? In many cases, reassuringly perhaps, nothing.
It is the umbrella that is responsible for the correct application of PAYE, and it is the umbrella that holds the liability if their expenses are successfully challenged. That is clearly highlighted by the ESL case. Even though, please note, ESL has said since the ruling that it has no liability to HMRC, partly due to the fact the judge ordered the parties to go away and agree particulars. The take-away that more people are more understandably more readily making is that the FTT’s judgment was in HMRC’s favour, against ESL, and the judgment means the reimbursements for travel and subsistence expenses made by Exchequer Solutions Ltd to its employees should have been subject to income tax and National Insurance Contributions.
As a contractor (where you are an employee of an umbrella), you may find in your employment contract with the umbrella that they have the right to pursue you for repayment if additional taxes become due. But the reality is that most workers’ expenses are small and therefore the tax per worker is minimal, meaning that the process of recovery would probably cost more than the liability itself!
Lastly, don’t get the wrong idea
However, be warned. This doesn’t mean it’s open-season this summer for your contractor expenses if you’re signed up with an umbrella company. Workers do have a responsibility in their claims of contractor expenses. Claims must be real and accurate. If a worker is making false or inflated claims that is a separate issue and would leave the worker open to full recovery, which could include the cost of that recovery.