Enter Your E-mail

The Low Incomes Tax Reform Group (LITRG) is warning that some employees risk being chased by the tax authorities - or losing benefits - because of their employers’ tax avoidance strategies.

Tax-Free Payments?

Employers frequently reimburse employees for business travelling and subsistence costs, incurred in moving from one temporary place of work to another. As it is basically a reimbursement of an employee’s expense on behalf of the business, it is not treated as earnings: the employee is not subject to tax or National Insurance and the employer likewise pays no National Insurance Contributions – there is a “dispensation”. It is important to clarify that this is common practice and in the vast majority of cases perfectly normal and acceptable – although HM Revenue & Customs (HMRC) may sometimes disagree with employers (and employees) as to what constitutes a “temporary workplace” on a technical basis.

Salary Sacrifice – How the Employer Benefits

However, LITRG has reported in its article, “Umbrella Schemes, etc - The Risks to the Low Paid Worker” that it is aware of some cases where employers or agencies are effectively treating payments as tax/NIC-free reimbursements, so as to reduce employers’ NIC costs and overall wage payments. The employee has ‘sacrificed’ some of his or her pay in return for the tax/NIC-free payments. In some cases the level of remaining ordinary pay has ostensibly fallen below the National Minimum Wage, and in others it appears that the employee has not incurred eligible travelling and subsistence costs in the first place.  Both scenarios appear to contravene applicable regulations.

Implications for Employees

Whilst in many cases HMRC will take issue only with the employer, LITRG warns there nevertheless remains a risk that they will also pursue the employee for amounts they reckon to be due on these “reimbursements”, basically in cases where HMRC believes that the employee has knowingly participated in the questionable arrangements.

Also, if HMRC subsequently revises its assessment of an employee’s taxable pay, not only may they be personally liable for the increased tax and NICs, they may also find their increased income means they have received too much in the way of Tax Credits, or the Universal Credit which will soon replace them.  Worse, they could even be charged a penalty for under-declaring their income.

Many workers will simply be more concerned about having a job, than worrying about whether or not their payslip “makes sense”. Ironically, if someone turns down an offer of employment because of concerns over the pay arrangements, then they risk losing benefits anyway!

What to Do

We do share LITRG’s concerns on behalf of low-paid workers who risk real hardship if they are unwittingly subject to such arrangements. We must emphasise that there are very many “salary sacrifice arrangements”, “dispensations” and/or “reimbursements” which are completely correct and in order and LITRG’s focus is on only a very small minority of arrangements but the implications for employees who are caught up in that minority are potentially very severe.

HMRC has published guidance on its website about “Pay Day by Pay Day Tax Relief Models” – which includes a confidential e-mail address that people can use to contact HMRC if they do have concerns.

Technical

Tax practitioners will be aware of at least one relatively recent employment appeal tribunal case which appeared happy to find that a series of continual (but not continuous) daily (nightly) appointments effectively comprised an overarching or “umbrella” employment.  Whilst employment rulings do not necessarily translate perfectly to tax, it may not be appropriate to discount such arrangements as having no merit or substance whatever. We shall perhaps have to wait to see what the tax tribunals have to say – no doubt these arrangements will be tested in due course. Meanwhile, HMRC certainly seems keen to challenge such arrangements, and employees may be pursued as outlined above.