National Minimum Wage – Consultation on travel and subsistence expenses for temporary workers

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Alongside the 2009 Pre-Budget Report, the Government announced that it intended to address the problem of potentially exploitative arrangements that are implemented for some temporary workers paid at or near the National Minimum Wage (NMW).  HM Treasury has now published a consultation document, entitled National Minimum Wage workers: Travel and subsistence expenses schemes, which explains the means by which it is proposed that NMW workers should be protected.

Many temporary workers, including those who are paid at or just above the NMW, participate in travel and subsistence schemes operated by some temp agencies and umbrella companies.  The schemes make use of the tax and NICs relief available for expense paid for travel to temporary workplaces.

For a temporary worker, the workplace for the current and each subsequent assignment is a permanent place of work and the travel from home to these workplaces does not qualify for tax relief.  However, by engaging temporary workers under an “overarching contract”, the worker has a single contract with the umbrella company or temp agency which encompasses all of the individual assignments.  The effect is that each workplace becomes a temporary place of work, the travel expenses for which qualify for tax and NICs relief.  The umbrella company normally obtains a dispensation from HMRC in order not to have to report the expenses payments.

To take advantage of both the tax and NICs relief, the workers enter into a salary sacrifice arrangement with the umbrella company or temp agency, whereby the earnings from the assignment are reduced by a defined amount, and that defined amount is then paid to the worker as legitimately untaxed travel and subsistence expenses.

The normal situation for employees whose pay is at or just above the NMW is that they are unable to sacrifice salary as this would reduce their hourly rate to below the NMW rate.  As defined in the almost incomprehensible rules in the NMW Regulations for what does or does not count towards the NMW, expenses paid “in connection” with the worker’s employment do not count towards the NMW.  The term “in connection” is not defined and it is interpreted by HMRC as applying to the reimbursement of costs incurred by the worker in performance of the worker’s duties.  However, the time spent travelling to a temporary place of work and the costs associated with such travel are not treated as being “in connection” with the employment.  As a result, if the employer reimburses those costs, the payments, as well as enjoying tax and NICs relief, do count towards the NMW.

In the following example, the worker’s hourly rate of pay is £5.80, the adult NMW rate.  The parties agree to a salary sacrifice, reducing the gross pay by £95 for the week and replacing it with £95 of travel expenses.  Tax code is 647L and NICs Table letter is A.

The savings for both parties are considerable; £29.45 per week for the employee and £12.16 for the employing umbrella company.  The worker’s pay for NMW purposes is reduced by the £95 sacrifice but increased by the £95 expenses, so that the employee still receives £232 – enough to comply with the NMW rules.

In some cases, however, HMRC has seen such salary sacrifices operate where the employer does not pay the travel expenses in full, or deducts an administration charge.  In the following example, the sacrifice is still £95 but the expenses payment is only £72.

In this case, the employee benefits by an extra £6.45 – enough to sell the scheme to an unsuspecting worker – but the employer benefits by £35.16 – the £12.16 NICs saving, and the £23 that is withheld from the employee.  However, the arrangement is in breach of the NMW because, for NMW purposes, the total pay is £209 (£137 + £72), less than the minimum £232.

Such an abuse of the tax and NICs relief arrangements is just one of the reasons why HM Treasury, in the new consultation document, proposes to amend the NMW rules.  Other issues for lower-paid workers discussed in the document are:

• Because the gross pay is reduced by the sacrifice, the temporary worker has to work many more weeks in the year for earnings to reach the annual NICs lower earnings limit, the minimum required to have access to some earnings-related contributory benefits.  If there are gaps in assignments, earnings in the year may not even reach the LEL.
• Some umbrella companies and temp agencies refuse to operate travel and subsistence schemes for lower-paid workers, taking the view that they exploit the workers.  Such businesses are at a competitive disadvantage as a result.
• Workers who participate in travel and subsistence schemes are entitled to significantly higher tax credit payments than those who don’t.

The proposal by the Treasury is to amend the NMW Regulations so that expenses paid to an employee for the cost of travel from home to a temporary workplace along with associated subsistence costs will not count as pay for NMW purposes.  The consultation document asks for comments on a number of questions and, if the decision it to proceed with the change, it will be implemented from October 2010.

The effect of the change to the NMW rules would be that workers currently participating in travel and subsistence schemes will experience an increase in their gross pay and a reduction in their net pay.  Their pay for NICS and contributory benefits purposes will not be able to drop below the NMW.  As a result, all temp agencies will compete broadly on the same terms.

The Government anticipates two different responses to the proposed change:

1. Some temp agencies may revert to engaging workers through agency contracts, with the effect that any travelling costs to the client’s premises and associated subsistence costs would not be eligible for tax relief.
2. Some temp agencies may continue to engage workers through overarching employment contracts and pay tax free expenses in addition to NMW pay.

Nothing in the consultation document is intended to bring an end to the general use of salary sacrifice for the payment of travel and subsistence expenses.  The broad issue of the use of overarching employment contracts to avoid tax relief on travel expenses was consulted on in 2008 and the outcome was that no action would be taken to change the rules, only that HMRC would increase compliance checks in this area.  The current proposal is intended only to protect those workers with earnings at or just above the NMW.

Further information:

National Minimum Wage workers: Travel and subsistence expenses schemes

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This entry was posted on Thursday, February 18th, 2010 at 12:22 and is filed under Compliance, Minimum Wage, National Minimum Wage, NMW. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.