With the recent news that an umbrella provider has lost its case against HMRC in the First Tier Tribunal, and faces a tax bill of £11m, here we take a two-part look at the main issues in the case and examine what providers can do to ensure compliance.
Overarching Employment Contracts
To explain the background to this case, it’s necessary to understand the definition of overarching employment contracts (OECs), and how they are interpreted.
Prior to 2016, the rules around OECs were different. Pre-2016, each workplace could be assessed as a temporary place of work for tax purposes – this allowed expenses for commuting and subsistence to be claimed. These rules were essential to the compliance of an umbrella company’s expenses policy , and in the recent tribunal case, the question was whether OECs were in place.
For OECs to be effective, the period between assignments must conform to a certain level of mutuality of obligation (meaning that both the umbrella company and its contractors have mutual obligations towards each other) in order to create an overarching employer/employee relationship. The correct operational processes and procedures, as well as specific contractual terms within the contract, must also be adhered to. Contractual terms alone may not be enough to create OECs, and may actually be undermined if they conflict with the reality of a given situation.
After 2016, when the rules were changed, a Supervision, Direction and Control (SDC) test was introduced.
This means that each assignment that a contractor undertook was treated as a separate engagement, or a series of permanent workplaces, for tax purposes, regardless of the contractual terms in place. Some umbrella companies assessed workers as outside of SDC and utilised an OEC, meaning that their expenses (usually mileage) were allowed. Further 2016 changes meant that dispensations for umbrella companies were removed, which required them to change their expenses policies and practices.
The rule change also included a new ‘Relevant Salary Sacrifice’ (RSS) test. This prevented many expenses from being claimed where they were reimbursed from ‘general earnings’. Some exceptions were allowed with the key one for umbrella companies being the statutory Approved Allowance Payments (AMAP) which allows reimbursement for mileage expenses when travelling to and from a temporary place of work. Many umbrella companies, therefore, operate mileage-only expenses policies, with any other allowable claims being claimed solely through P87 or Self-Assessment Tax Returns.
Guaranteed Hours of Work
In order for a contract to be classified as overarching and to fulfil sufficient mutuality of obligation, HMRC states that it must offer a contractor a minimum of 336 hours per year).
Without this stipulation, a provider would struggle to prove that it is indeed an OEC. Furthermore, simply including this term in a contract may not be sufficient to actively demonstrate that this obligation is being managed, and may undermine its value within the contract.
As a provider, umbrella companies should be able to demonstrate that they are managing and measuring this hourly obligation, and if a shortfall is found, they should be financially compensating their contractors in order to bring the annual total up to the stipulated 336 hours.
Assistance to Find Future Work
Compliant providers will state in their contracts that, while they cannot always guarantee that contractors will be given work, efforts will be made to assist them to secure employment. The most reputable umbrella companies will have clear and demonstrable processes in place. In the case of the First Tier Tribunal, the judge stipulated that umbrella companies must do more than simply refer a worker to an employment agency.
To assist providers in these situations and to ensure that they comply with all aspects of employment law, Professional Passport has its own ‘white labelled’ job site for umbrella companies to embed into their own websites. There are generally around 15,000 jobs listed there at any one time, and can offer providers a real and demonstrable way of being seen to assist employees in finding new roles once their contract has ended.
In our next blog, we’ll be looking at further steps providers can take to ensure that they remain both compliant within a rapidly-changing legal landscape and offer their contractors the best possible service.
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