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There are new rules designed to prevent workers engaged through an umbrella company from benefiting from tax and National Insurance contribution (NIC) relief for home to work travel expenses.

Introduction

New rules from 6 April 2016 have been designed to prevent workers engaged through an employment intermediary, such as agency workers working through an umbrella company, from benefiting from tax and National Insurance contribution (NIC) relief for home to work travel expenses. As this was one of the main reasons for using an umbrella company in the first place, is it now worth working through such arrangements, particularly when there is often a fee to pay? Here LITRG breaks down some of the considerations to help you make an informed decision.

It is assumed that if you are reading this, you understand how umbrella companies work. If you do not, you may find it helpful to read the LITRG report 'Travel expenses for the low-paid – time for a rethink?' (or at least the introduction). It is also assumed that you are not still having your home to work expenses processed by an umbrella company (i.e. deducted from your taxable salary and then reimbursed on a tax- and NIC-free basis). If you are, or if you are now in some different type of arrangement designed to get around the new rules, you should be extremely cautious. You can find out more in the LITRG news piece: ‘Agency workers – new tax year, new troubles’.

How have things changed for umbrella companies?

As stated above, from 6 April 2016 agency workers can no longer claim tax and National Insurance relief on their travel and subsistence expenses. Since umbrella companies cannot now offer workers the same ‘tax efficiency’ as before, they may have been expected to shut up shop. However, this has not happened because many agencies are unwilling to deal with taxes and day-to-day staffing issues, preferring to delegate such matters to umbrella companies.

Should I use an umbrella company or insist on being paid by the agency under their own PAYE?

As ‘agency PAYE’ should not involve you paying a fee, your instinct is probably that you are better off not working via an umbrella company. However, you may be confused by what you are hearing from the umbrella companies who may be down-playing the importance of their home-to-work expense processing role and highlighting the attractiveness of the other benefits they can provide over agency PAYE, for example ‘employee’ rather than ‘agency worker’ employment rights (including redundancy and unfair dismissal rights), a childcare voucher scheme or shopping discounts.

These may or may not be important to you, depending on your circumstances. But you may also be told that the umbrella company can continue to process other types of job expenses via the payroll and give automatic tax relief, and that it can reduce your administrative burden by providing a continuous payroll link from one agency to the next. But what does this really mean? If you are thinking of paying a fee to an umbrella company, it is important to understand what you are getting for your money.

Can umbrella companies still process expenses other than home-to-work travel?

You may be told that even after 6 April 2016 you will still be eligible for tax relief on expenses that you personally incur if you work through an umbrella company – just not those related to home to work travel. This sounds promising, but there are a couple of things you should know.

1. The expenses rules for workers are very tightly drawn, meaning there may be few expenses for the umbrella company to process. The key is that the expenses must be "wholly, exclusively, and necessarily" incurred in the performance of the employment. Basically, this means that you have to incur the full expense in order to do your job.
   
   Expenses that qualify include the cost of professional subscriptions (for example, to a body like the British Medical Council to prove you are properly qualified and fit to do your job), upkeep of tools, or specialist clothing – and travel expenses incurred while working (rather than getting into work). These travel expense rules are very complex and, although there is a useful HMRC booklet explaining them, it is worth looking at what is covered in more detail.

• Allowable travel expenses post April 2016 can include trips from your assignment office or other work location to visit a customer or other workplace, and can also include travel directly from your home to visit a customer or to another workplace (unless the journey is practically the same as the journey from your home to your normal place of work, for example, because the customer lives near your office).
• Travel expenses of those who have a ‘travelling appointment’, (i.e. where the duties themselves inherently involve travelling) such as a delivery driver or meter reader, are also allowable. A person who holds a travelling appointment can get relief for all their travelling expenses (even where the journey starts from home!). Where they have to attend an office or depot at the start and end of the day to report in or receive instructions, say, travel between there and home is not allowable.
• HMRC also accept that travel expenses of agency workers who undertake a number of different jobs for an end client on the same day are allowable, even though they are not ‘travelling appointments’ as such. This rule is intended to cover people such as home care nurses or domestic cleaners. In these cases, HMRC say that they will accept that the cost of travel between different jobs on the same day is allowable; however, they will not accept a deduction for the cost of travel from home to the first job of the day or to home from the last job of the day.
• Following on from this, they also accept that when an agency worker incurs expenses in travelling between the premises of two or more end clients in the course of a day, the expenses of travelling from one to the other are allowable provided that the end clients were all obtained through the same agency, and the worker starts and finishes the day at their own home. LITRG's understanding is that this rule is intended to cover situations like that in example A below.

2. You should be aware that even if you do have some qualifying expenses, the umbrella company should not be replacing (or ‘sacrificing’) some of your taxable salary with tax- and NIC-free reimbursed expenses, and giving you relief as part of your weekly/monthly payroll, as they have done previously. This is because new rules from 6 April 2016 require employers to operate PAYE tax and NIC on any expense payments made to employees in connection with ‘relevant salary sacrifice arrangements’ – which are used by most umbrella companies. Some umbrella companies may tell you that they have designed a process that doesn’t fall within the definition of ‘relevant salary sacrifice arrangements’ – however, this is probably against the spirit, even if not the actual word, of the law and will no doubt be dealt with by the Government in due course.

Is claiming relief on expenses something I, as an agency worker, can do myself without working through an umbrella company?

Yes. You can instead claim tax relief (but not NIC relief) at the end of the tax year on form P87 (or through a tax return if your expenses are more than £2,500 or you need to complete one for any other reason). It is important to note that this relatively straightforward process is available to any person who has incurred allowable expenses – not just those working through an umbrella company – and LITRG provides further help and guidance on claiming back expenses, including an annotated example of form P87, in the 'Forms’ section of its website.

The only exception to this ‘salary sacrifice’ restriction is for business mileage in your own car (which is covered by a separate rule), meaning umbrella companies can continue to replace your taxable salary with tax- and NIC-free mileage payments throughout the tax year. This is preferable to the default position of being able to claim only tax relief and no NIC relief, and then only at the end of the year. However, considering that the situations in which you can claim mileage are quite limited, you would need to think carefully about whether such a salary sacrifice ‘facility’ makes the umbrella company fee worthwhile – particularly if it is levied on an ongoing basis, not just when some money is saved.

Can umbrella companies ease my administrative burden?

PAYE usually works best when an employee has a single, stable job that lasts a complete tax year. Agency workers, who often change agencies in quick succession, sit uneasily with the operation of PAYE so having an umbrella company acting as a single employer through which to channel all your pay and tax from one agency to the next can be helpful in preventing things like ‘emergency tax’.

Saying that, ‘emergency tax’, if not avoidable altogether, is usually only a temporary problem. Let us look at this in a bit more detail to help you decide whether it is worth paying a fee to avoid what is essentially a cash flow inconvenience.  

When a worker leaves their job, an employer should complete form P45 and give the employee a copy showing the total pay and tax to date in the tax year and the tax code in use. Passing the form to a new employer when the worker starts a new job allows tax to be collected on the correct, cumulative, basis. If a person is not able to provide their P45 at the time they start their new role to notify their tax code, they should complete a starter checklist. It is a possibility that an emergency tax code will be used initially (which will look like this: 1100L W1 or 1100L M1) making sure that you get some tax-free pay each pay day but no other allowances or reliefs that you may be entitled to. Under such a code you may overpay tax; however, HMRC should notify a revised code as appropriate after receiving your new employee information from your employer, meaning any overpaid tax to date should be refunded to you in your next pay packet.

Sometimes emergency tax can take the form of a 20% flat rate deduction (code ‘BR’), for example where you have two jobs or are registered with more than one agency at the same time. This is because the standard code giving you your tax free amount will be used against your first or main job and so any wages from a subsequent job need to be taxed at 20% to help ensure you have paid enough tax at the end of the year. A BR code is not easily displaced; however, if it means you have overpaid, a refund should come back to you automatically at the end of the tax year once HMRC have put all your pay and tax details together – see example B at the end of this piece.

How can I, as an agency worker, improve my PAYE situation without using an umbrella company?

There are a number of simple things that agency workers can do to help ensure PAYE operates as smoothly as possible for them throughout the year, without using an umbrella company. Some of them are listed below:

1. If you have decided to finish with an agency, do not just assume that they will know to close down your payroll record once your last assignment has finished. Make sure you inform them you are leaving and request your P45. Unless you do this, the agency may consider that you are available for work and will keep you on ‘the books’ until they carry out a database cleansing exercise. This means: 1) that you will not be able to provide your new employer with a P45, meaning an emergency tax code will need to be used, and/or that 2) HMRC will have a ‘live’ employment record for you, meaning that they may consider a 20% flat rate deduction appropriate for your new job.
2. Sometimes the issue of a P45 by a former agency can be delayed (often due to large numbers of workers coming and going). It may be useful to know that, by law, you must be issued with a P45 as soon as possible once you have finished your job. P45s may now also be issued electronically (for example as an email attachment) – hopefully making it easier for you to get yours.
3. When you receive it, keep your P45 somewhere safe so you are able to provide it to your new employer – this may sound obvious, but please be aware that it is not possible for employers to issue duplicate P45s in the event that the original is lost or destroyed.
4. Where you do not provide a P45 or a starter checklist, emergency tax will likely take the form of a flat rate 20% deduction (code ‘0T’ – meaning you have no personal allowance allocated to you), even if you only have one job; however, this can be displaced by providing your P45 or a Starter Checklist to your new employer.

Conclusion – what should agency workers do now?

On the face of it, umbrella companies have a few advantages over agency PAYE – they provide a continuous payroll link which can be helpful in preventing overpayments in the short term and allow you to ‘salary sacrifice’ to save some National Insurance on any business mileage that you do. However, whether these are really ‘advantages’ will depend on the level of fee the umbrella company charges you to provide them.

If, having weighed up all the issues, you decide you do not want your pay processed by an umbrella company and want to be dealt with under standard agency PAYE, you should make this clear to both the umbrella company and the agency. Although the agency may be reluctant to process your pay themselves, under law they are primarily responsible for paying the temporary work seekers they supply.

If you are already using an umbrella company, which you now wish to leave, ideally they should not put any obstacles in your way – your only concern should be to ensure that they fully pay you all amounts owed before you switch over. Some may have a tie-in period, with costs if you leave early – you may need to check the contractual arrangements you have committed to when you signed up.

If you have any problems under either scenario, you should seek advice from the ACAS helpline, which provides free advice on employment rights.  The number is 0300 123 1100 and opening hours are Monday – Friday, 8 am – 8 pm and Saturday, 9 am – 1 pm. Customers with a hearing or speech impairment can use the Text Relay service 18001 0300 123 1100.

Example A – Tax and National Insurance relief on mileage claims

Neil lives in Reading and works for a construction agency. The agency arranges for him to work for a week as a labourer on a property development in the former athletes’ village in the Olympic Park. On day 3, he gets a call from the agency telling him to drop what he is doing (they have cleared it with the property developers) and spend the afternoon at the Maidenhead Crossrail site as someone has phoned in sick and they urgently need an extra pair of hands. Neil gets in his car after his morning’s work in East London and drives about 66 miles round the M25 and up the M4 to Maidenhead.

Generally, travelling expenses between two different ‘employments’ are not allowable; however, under HMRC’s special rule on ‘Agency and temporary workers: travel between premises of different clients’ they will probably accept a claim for the 66 miles in these circumstances.

Neil can use the HMRC approved mileage rate of 45p per mile for the first 10,000 miles and 25p thereafter as the basis of his claim, worth £29.70. If he works through an umbrella company, he can sacrifice £29.70 worth of taxable salary and receive the £29.70 back on a tax- and NIC-free basis. As a basic rate taxpayer, this essentially saves Neil around £9.50 there and then. If Neil does not work through an umbrella company, he can make a claim for tax relief at the end of the tax year, resulting in a tax refund of £5.94. There is not a similar deduction for NICs purposes.

Let us look at this another way, assuming Neil earns £100 for his work that day and is a basic rate taxpayer:

Example B – how PAYE codes operate for agency and umbrella company workers

Jazz signs up for a marketing agency and starts an eight-month long assignment for them in April 2016 during which she earns £1,200 per month. A tax code of 1100L is allocated, which tells the agency she can have £917 of tax free pay each month and that tax of £56.60 is due on the rest (over 8 months this equals £452.80).

She has a few months off, then finds an assignment through another agency (she wants to stay on the books of the first agency in case they come up with a better role). Because this is technically a second job, a BR code will be allocated meaning 20% tax is deducted on every pound. She earns £250 a week for 8 weeks. Her weekly tax deductions are therefore £50 (£400 in total over the 8 weeks).

At the end of the tax year, Jazz has overpaid £732.80 tax (see below). This will eventually be refunded to her by HMRC after the end of the tax year; however, had she worked in both jobs through an umbrella company, they would have continued to operate the 1100L code against the second agency job, avoiding the overpayment in the first place.

Useful links

LITRG article with links