The news that Reed had lost its appeal against tax liabilities of £158m served as a much needed wakeup call to any employment business which uses a salary sacrifice arrangement to increase the take-home pay of the worker and reduce payroll costs. Umbrella companies should also heed the message as many of the points raised in “Reed” are applicable to the calculation which is used to arrive at Net Pay.

The Case

Reed employed workers on contracts of employment and operated a salary sacrifice arrangement in lieu of tax free expenses for employees who worked at a succession of sites. The scheme was implemented following amendment to tax legislation in 1998 when the temporary workplace rules were relaxed. Unfortunately, despite taking advice, Reed failed to properly address the concept of an overarching contract (which affected the temporary workplace position) and did not enter into formal arrangements with regard to the salary sacrifice. Although HMRC had issued a dispensation when the scheme was first inspected and this was subsequently updated four times, the dispensation was eventually revoked in 2006. To underline the lack of communication with the workers, HMRC had been prompted to review the arrangements by the high number of queries from those workers who participated in the scheme.

It is worth considering the three elements of the case which turned on the facts.

Salary Sacrifice

A salary sacrifice involves a contractual arrangement for the worker to irrevocably give up part of taxable pay, usually in return for a benefit which has a different treatment for tax and National Insurance purposes. The permanent and complex nature of the arrangement means that it is vital that it is fully explained to and understood by each worker. The tribunal found that Reed failed to pay any reciprocal benefit to the worker in return for the sacrifice or indeed explain that they needed to give anything up. In addition it was found that there was insufficient explanation of the scheme to enable the workers to make an informed decision and there was significant unpublished financial advantage to the company. As such, the sacrifice was deemed to be invalid.

Overarching Contract

For travel costs to be tax deductible employees must be classed as working at a temporary workplace. To be classified as working at a temporary workplace, employees would have to be employed under a continuing ‘overarching’ contract of employment. The nature of an overarching contract of employment is that it links together a series of assignments with the expectation that the worker will continue to move to further assignments with that particular employer. In doing so, the terms of the contract would apply throughout the period of employment, whether or not the worker was on assignment. In the case of Reed, the contract of employment did not provide for any mutuality of obligation between the two parties during periods between assignments and as such, did not demonstrate a continuing contract of employment.

Permanent Workplace

In absence of an overarching contract of employment, each assignment has to be viewed as an individual employment and so, the work location is regarded as a permanent location. Travel costs to a permanent location are not tax deductible leaving Reed with a massive liability.

The Lessons

The Agency Workers Regulations 2010 (AWR) came into force 1st October 2011.

Having consulted with our team of legal/tax advisors and YOU, our customers, Zeva have developed amendments to our current procedures that will not only implement the regulations, but could save you money.

Although we are unable to cover all aspects of the new regulations here, we have provided a simple explanation of our intentions.

The 1st thing we should say regarding the AWR changes is that it doesn’t apply to everybody, and we are very aware that some agencies are implementing bespoke solutions between themselves and their end clients to minimise its impact.

So therefore, when AWR does not affect your workers, for example:

• • work on short assignments (under 12 weeks)
• • have no permanent comparator
• • are currently paid parity

Zeva will continue as normal, employing these workers under our current 336 hour regulation 5 hybrid contract of employment and apply tax relief on the expenses your workers incur.

Where your workers may be caught by AWR, the agency can either:

1. a. Carry on as normal for up to 12 weeks, and only then decide which workers to pay parity or change to a derogated contract.
2. b. Engage workers on a Derogated contract with no added fees.

Our existing procedures will continue to manage worker queries, assess entitlements and capture a full audit trail including a record of all communication.

We hope this brief FAQ below will be of help, but if you require further explanation, please call Angie or
Jane on 0808 168 2772

For more information regarding AWR and Zeva’s solutions, please call Angie or Jane on 0808 168 2772

What about existing workers

At 12 weeks from the 1st October we will contact the agency to ascertain if there is any comparator data. The agency need do nothing else until then.

HM Revenue and Customs (HMRC) issued a statement on 11 July 2011 relating to what it described as a “pay day by pay day tax relief model”.

On the face of it, the statement appears to be a weak attempt at clouding what is a genuinely available by reference to current legislation and case law, in order to prevent a leakage of tax revenues at the expense of the most vulnerable workers in our society – the low paid.

National Insurance Contributions (NIC’s)

At the outset, we wish to point out that the statement contains a glaring inaccuracy in connection with NIC’s. Our technical adviser duly contacted HMRC’s policy division on the day of its release in an attempt to correct the inaccuracy. He has been promised a response “in due course”.

Briefly, the inaccuracy concerns the disregard from NIC’s which is available for travelling expenses (Regulation 9 Schedule 3 Social Security (Contributions) Regulations 2001). HMRC states that this regulation “provides that payments made by the employer to the employee to cover certain travelling expenses incurred by the employee can be disregarded in the calculation of earnings for National Insurance purposes…….”

The regulation itself makes no reference to the fact that the employer is required to make a payment. In fact, it clearly states that;

“any specific and distinct payment of, or contribution towards, expenses which an employed earner actually incurs in carrying out his employment” shall be disregarded from NIC’s.

It follows that in the event that an employee incurs a qualifying business expense it is not “earnings” as it is not “remuneration or profit derived from the employment”.

In his judgement in the recent case involving Cordant plc, Judge Parker confirmed the position in relation to expenses as follows;

“He or she cannot perform the job without incurring them. Such expenses, therefore, may not fairly and reasonably be treated as forming part of the worker’s remuneration, or the pay that he or she would otherwise take home and could otherwise apply to current consumption or saving and so should not form part of the amount on which income tax and NIC are charged. It does not matter whether the worker has paid the expenses (he deducts the expenditure from chargeable income), or the employer has reimbursed the worker for the expenditure, or the employer has paid the expenditure on behalf of the worker (in the latter cases, the amounts received or paid do not form part of the chargeable emoluments of the employment, or if they did, they would be immediately deductible as legitimate expenses of the job.

The Judge clearly saw the proposed amendment to the NMW Regulations as bringing the method of computing income for National Minimum Wage purposes into line with that adopted for income tax and NIC purposes.

In relation to taxation, HMRC continually fails to explain why there is no facility to grant tax relief on a weekly or monthly basis preferring to suggest that the benefit of tax relief for expenses is enjoyed at the end of the tax year and that there is no statutory framework for employers to operate the re-claim process.

This statement fails to take account of the fact that coding restrictions apply on a weekly or monthly basis and that the proposed “Real-Time Information” (RTI), effective from April 2013, aims to ensure that the correct amount of tax will be paid “in year”.

The statement is further undermined by the consultation document “Integrating the operation of income tax and

National Insurance contributions” which was published this week.

This document seeks evidence on the alignment between tax and NIC’s and states;

For decades, we have operated income tax and NICs as two fundamentally different systems with different periods and bases of charge. The resulting anomalies impose costs and complexity on employers, and cost the taxpayer through the administration burden on HM Revenue & Customs. We believe that greater integration of the two systems has the potential to remove economic distortions, reduce burdens on business, and improve fairness across individual earners.

Conclusion

It is over six months since the judgement in the Cordant case and HMRC has come up with what can best be described as a vain effort in justifying what is clearly available by reference to the legislation and current case law. Such justification has just one aim – the protection of HM Treasury revenues.

In its own conclusions, HMRC invite those operating the pay day by pay day relief models to “consider whether your business model is compliant with tax and NIC legislation”. It adds that “if you are in any doubt, you are recommended to seek advice from a professional adviser or HMRC”.
The statement falls well short of suggesting that employers should cease using such arrangements and there is certainly no warning concerning possible retrospective action.

Using carefully selected phrases such as “HMRC understands that…” Information obtained by HMRC thus far indicates”…… might just suggests that HMRC is far from confident that it has got the technicalities right. Indeed, with a GLA Board Meeting scheduled for this week, it had to produce something to justify the comments made in the GLA Brief which appear to have been prompted by HMRC.

We have relied upon a strict interpretation of the legislation and taken support from case law which means that our clients can take great comfort in the fact that our PTR business model is based on sound principles.

Alan Nolan, Senior Partner
Aspire Partnership LLP
www.aspirepartnership.co.uk

Spokesmen within the construction industry have stated that the data does not match up with anecdotal evidence and some bosses are concerned about how the ONS collects its data on orders, with companies asked to submit orders about six weeks earlier than before the ONS changed its methods last year. While no one is under the illusion that the industry is booming, these latest statistics have left people scratching their heads.

The Construction Products Association says 48pc of its members enjoyed a rise of sales in the opening three months of 2011, compared to just 14pc in the final quarter of 2010. A spokesman for the CPA said: “The latest figures from ONS indicate that construction output fell by 4pc in Q1, but this conflicts with our evidence from contractors, specialists and construction product manufacturers as shown in our latest Construction Trade Survey that both workloads and sales rose in the first quarter of 2011.

Many have also been quick to say that the mild and dry unseasonal weather coupled with a rise in sales for many companies clearly points to an improvement in the industry rather than a contraction.

HMRC have stated that they want to avoid where multiple inspectors would make compliance visits in consecutive months. However, businesses deemed to be ‘high risk’ for underpayment will be firmly on HMRC’s radar and they would be automatically assessed for a full range of taxes.

“We want to get off the back of honest businesses,” said an HMRC spokesman.

Form June it will be testing the new procedures for a period of 6 months before rolling it out nationally in January 2012. David Gauke, Exchequer Secretary, said: “We know that agents, individuals and businesses find some of HMRC’s current compliance practices drawn out and costly. A single compliance process could help HMRC improve the customer experience and reduce costs.”

Gillian Econopouly, head of policy at the Recruitment & Employment Confederation, says: “We cannot lose sight of the fact that the jobs market remains volatile.

Recent reports by REC shows that while hiring activity in certain sectors is steadily increasing, there is still concern over the effects of public sector cuts and the creation of a two speed jobs market. However, employer confidence is on the rise and there is a sense of optimism surrounding the current landscape of employment. Whether the younger end of the spectrum will benefit from any new found confidence from employers remains to be seen.

Nigel Meager, director of the Institute for Employment Studies has stated that: “The latest official employment figures provide further confirmation that the recovery in the UK labour market is faltering and somewhat anaemic. The worse news is that big public sector job cuts will shortly pull out the bath plug, and overall employment levels may well fall again.” Meager has also stated that he believes that the UK is faring worse under the recession than many other countries. By early 2011 UK unemployment had fallen only 2%. This is in stark contrast to countries like Italy and Germany who saw a fall of 4% and 18% respectively.

Some construction projects in the UK have been idle for as long as 2 years and many construction companies did not have the staff to meet the growing needs of the industry. Sensing that there is still a lot of construction that needs doing in the country many recruiters have begun to expand their teams to handle to potential influx of projects that need staffing.

The Totaljobs Barometer, released in April, indicated that the construction sector was one of the main industries helping to lead recovery in the UK jobs market. There was a 30 per cent increase in the number of available construction jobs during the first quarter of this year, when compared with the final three months of 2010. Hopefully this is an indication of good things to come.

At present, despite denials one thing is certain: when the taxman charges 3pc on overdue bills but only pays 0.5pc on overpaid tax it is due to repay, then HMRC has a vested interest in delay. These delays in tax refunds have become more common in recent years but it has been made substantially worse by HMRC taking as much as ten weeks to carry out security checks on individuals due refunds. There is no denying that there is a need to carry out these checks but a waiting period of ten weeks is undeniably long and excessive.

Individuals are now being advised that completing a self assessment tax return may not be enough to produce a refund where one is due and that they should be prepared to chase HMRC sooner rather than later.

A spokesman of HMRC has stated that: “Most refunds are made very promptly but we carry out a range of automatic and manual checks to make sure the refund is a genuine one.

“Also, the rate of interest on overpaid tax reflects the average commercial rate for a return on deposits. No commercial body has the same rates for both paying and charging interest.

“The rate of interest charged on unpaid tax is designed to encourage payment at the right time and to recompense the Exchequer for the loss on taxes paid late. If the interest rate on overdue tax was too low, it might encourage people to treat HMRC as a source of cheap credit. If the interest rate on overpaid tax was too high, it might encourage banking with HMRC.”

The question we all need to ask is can we call outright incompetence an attempt to profit. It may boil down once again to the sheer complexity of the tax system but surely not everyone out there suffers from these errors. A lot would agree that HMRC need to take a long, hard look within.

Accordingly Zeva is phasing out PAYE+ in favour of a Personal Tax Relief (PTR) model. This changeover will be complete by October, but there are strong reasons why many of Zeva’s customers should swap over now.

Zeva PTR has the following benefits over PAYE+ salary sacrifice:

• Higher levels of expense claims available, so greater savings available,especially for workers at or near NMW
• Greater share of savings rebated to the agency, up to 100%
• Holidays paid as taken, increasing agency cash flow
• Greater savings available to the worker, especially the lower paid
• Zeva PTR is completely compliant with HMRC and NMW regulations
• Zeva is registered with GLA

In addition to the above, Zeva also announce that it has developed an agency employer version of PTR, where the agency can remain the employer. This has several benefits including:

• Savings now available to agencies who were previously unable to ‘outsource’ their workers, and have to remain the employer
• Agencies who previously could not compete with much larger agencies who could afford the high initial costs of setting up their own PTR scheme, can now compete

For further information, please speak to one of our sales team on 0808 168 2772