Revenue in umbrella staff expenses shake-up
The Revenue has kept its word of tackling abuse of expenses in umbrella companies by withdrawing the allowance for staff who stay overnight with friends or family.
In their latest online briefing , officials at the UK tax office said their review of the Friends and Family Allowance found it had "no legal basis for giving tax relief."
Speaking to CUK yesterday, a spokesman for HM Revenue and Customs said: "The allowance was first included in dispensations some years ago.
"It is clear that by offering an allowance where there is no evidence of payment of expenses by the employee or obligation to make a payment, it is a round sum allowance taxable under S62 ITEPA 2003 ."
Advisors half suspected the FFA was under threat, as they regard it as the most common tax-free expenses payment claimed by workers who fail to actually incur any costs.
From April 6, 2009, such an 'overnight on business' claim will be barred from new dispensations, HMRC said, and will be cut from all existing dispensations upon review.
Nor will the FFA get a scale rate in HMRC's new benchmark scheme, which introduces "advisory" tax-free rates for employers to pay staff for their subsistence costs.
"Although the rates are billed as 'advisory' rates," said Bauer & Cottrell, "HMRC make it clear that they will be moving towards standardising the different scale rates that they will agree".
Welcoming the scheme, the firm said it should bring 'consistency to the uneven playing field of expenses' and reverse the "lack of consistency" as to the amounts in HMRC dispensations.
HMRC admitted as much: "In response to concerns…about consistency between what is agreed for different employers, HMRC also proposes to standardise the different scale rates that it will agree with employers."
The scheme won backing from SJD Accountancy's Simon Dolan, who said a tax-efficient model employers can use to pay employees' eligible daily costs was "a long time coming."
"This is the start of standardisation across umbrella companies which is fantastic news, as it will remove the ridiculous and damaging claims, like 'increase your take home pay by using umbrella 'x.'"
Umbrellas are expected to start marketing themselves in ways other than 'HMRC Compliant,' forcing them to focus more on "differentiation by service, which can only benefit the contractor," Mr Dolan hoped.
According to B&C, if the scheme's rules are applied consistently, the only difference between net pay rates should be the fee each umbrella charges for its services.
Its founder Kate Cottrell said: "It will take some time for all companies to move across to this system, but I would expect many will do so before their current dispensation runs out because at last they will have certainty."
And Martin Hesketh, managing director of Brookson, said HMRC's scheme should be welcomed, for intending to both ease the burden on employers and provide "greater choice" in terms of how they deal with employee expenses.
Less positively, he said it seemed "HMRC has very much missed an opportunity with these changes in terms of addressing the existing abuse of scale rate payments within the umbrella services market.
"The announced changes are likely to have little impact on the significant minority of umbrella service providers, who will unfortunately continue to abuse the expense dispensations they have been issued by local HMRC offices."
Under the voluntary, benchmark scheme, which only applies to daytime subsistence, the sums, such as £5 or £10, are the maximum allowed, free from declaring tax and national insurance contributions.
On top of these conditional allowances, for one or two meals, HMRC has set two others rates, an early starter and late finisher rate, but only for use in exceptional circumstances.
Employers who opt-in to the scheme can even pay lower than listed rates, but any excess without HMRC approval will attract tax and NICs, says its bulletin, which officials published 20 days before the Budget.
"This new system shows that HMRC have addressed some of their concerns relating to umbrella companies ahead of the Budget, but there could still be further measures announced on April 22nd," Ms Cottrell said.
Employers who tick the box on the P11DX forms to say they will use HMRC's benchmark scheme to pay their staff travel and subsistence costs can avoid a sampling exercise.
Advisors say the Revenue was right to believe employers struggle with such exercises, aimed at identifying a reasonable level of allowable claims for the employer's staff.
Mainly, the advisors said, employment and umbrella companies found them "onerous" because of the completely different work situations common to many of the staff they provide.
Under the scheme, all scale rate payments for core daily expenses are eligible to outfits whose staff must travel to perform their duties, or must travel to a temporary place of work.
"If you want to apply to include other items of allowable expenditure in a dispensation for example fees and subscriptions, laundry, telephone charges, etc, you need to tick the appropriate boxes and supply the requested information on the [P11DX] form," HMRC told employers.
Employers' existing dispensations can be replaced by the scheme when HMRC reviews them, typically every five years, yet all applicants are likely to give HMRC a window into their business.
"The [application] process will highlight to HMRC any previous non compliance case where HMRC records show that the employer did not previously have a dispensation and also did not make returns on P11Ds," B&C warned.
To operate the scheme, employers must keep "sufficient records" to show the employee is entitled to the payment, and make checks to ensure conditions for travel expenses are met.
An HMRC spokesman explained: "The employer who opts to adopt the benchmark scale rates will still have to provide assurances that the members of the workforce who receive the scale rate payment satisfy the relevant statutory tests relating to travel and subsistence expenses, and that management processes are in place to monitor the payments after the dispensation is granted.
"HMRC may also seek further information before granting the dispensation. We would hope that in the majority of cases this will be a less time-consuming process [than a sampling exercise]."
After the FFA's removal, qualifying employers whose staff must stay overnight can only opt to reimburse the cost, or evidence the cost and agree a scale rate in a specific dispensation with HMRC.
In notes to the brief, the Revenue said the benchmark scale rates would be reviewed annually, but were currently the most popular sums large and small employers had requested for dispensations.
Advisors say that, overall, issuing allowed rates for expenses and capping them will make umbrella companies, and particularly those who use them, think much more carefully about how they operate.
Ms Cottrell explained: "Some umbrella users will reconsider their positions and consider going down the limited company route, irrespective of whether or not they are inside or outside IR35 as they could find themselves better off."
Yet the anticipated reach of the scheme appears shorter to Brookson, which said the Revenue's new approach was not sounding the death knell for dodgy expenses claims.
"Despite recent government scrutiny of this market, certain providers continue to encourage workers to claim high scale rate payments under existing dispensations without actually incurring the expense.
"This industry needs HMRC to use its existing enforcement powers against the non-compliant service providers to stop this practice," the firm said.
Mr Hesketh added: "There is a real concern that if the existing abuse by the minority of providers is not weeded out strongly, the government will lose patience with the industry, and ultimately produce a legislative solution which may significantly damage the industry as a whole."
Given the legitimate benefits for flexible workers who use dispensations, he said a heavy-handed response from the government would be "extremely unfortunate," but worried it remained a "very real" risk.
Although no estimates were made about the inevitable increase in receipts the scheme is likely to generate, the use of overarching contracts to duck income tax and NICs is officially estimated to cost the Treasury £300m a year.
Directory of umbrella companies
Click here for our umbrella company guide