HMRC warns against ‘payday by payday relief’ model

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Umbrella companies and employment businesses have been warned by HMRC that obtaining tax and NICs relief by deduction from gross pay breaks the law.

Umbrella companies and businesses supplying temporary workers are under fire again – this time for using a business model that applies tax relief and, in some cases NICs relief, on a “payday by payday” basis.

The “payday by payday relief” model is used for temporary workers who work under overarching contracts and, as a result, qualify for tax relief on travel and subsistence expenses.  (The “overarching contract” means that they have a single contract with an umbrella company or agency – and are therefore employees – but are supplied to work for a number of different clients.  Each client’s premises are therefore a temporary workplace and the cost of travel between them legitimately qualifies for a “deduction from earnings”, i.e. tax relief.)  The model operates as follows for each payday:

• the employee is paid gross pay that is at least equal to the relevant National Minimum Wage rate

• the value of the travel and subsistence expenses incurred by the employee in the pay period is deducted from the gross pay in order to obtain the tax and NICs relief

• the balance is subjected to PAYE tax and Class 1 NICs.

Many readers will immediately recognise what is wrong with this process.  It is the “net pay arrangement”, the use of which is restricted to obtaining tax relief for occupational pension and charity deductions, and both tax and NICs relief on the purchase of partnership shares under an approved Share Incentive Plan.

However, under tax and social security legislation, the net pay arrangement cannot be used to obtain tax and NICs relief on travel and subsistence expenses.

• Tax relief, properly known as a “deduction from earnings”, can only be claimed by the employee after the end of the tax year.  There is no statutory provision for it to be claimed by the employer.

• NICs relief, properly known as an “NICs disregard”, is certainly possible every payday but only where an employer makes payments to an employee to cover specific allowable travel expenses.  It cannot apply in the situation where the employee meets the costs of travel and subsistence personally.

There are three ways in which tax and NICs relief may be obtained legitimately:

1. Where separate and distinct expense payments or reimbursements made by an employer are covered by a dispensation:
• the employee is paid gross pay that is at least equal to the relevant National Minimum Wage rate, and the gross pay is subjected to PAYE tax and Class 1 NICs
• the employer makes additional separate and distinct payments or reimbursements of travel expenses that are eligible for a deduction from earnings
• if those expenses are covered by a dispensation, they can be paid without deduction of tax
• as separate and distinct business expenses, they are also not liable for Class 1 NICs.
2. Where separate and distinct expense payments or reimbursements made by an employer are not covered by a dispensation:
   • the employee is paid gross pay that is at least equal to the relevant National Minimum Wage rate, and the gross pay is subjected to PAYE tax and Class 1 NICs
   • the employer makes additional separate and distinct payments or reimbursements of travel expenses that are eligible for a deduction from earnings
   • if those expenses are not covered by a dispensation, they are added to gross pay and subjected to PAYE tax and, at the end of the tax year, the employee may make a claim for a deduction from earnings in order to recover the tax paid
   • as separate and distinct business expenses, they are not liable for Class 1 NICs.
3. Where the employee incurs expenses personally out of taxed income:
   • the employee is paid gross pay that is at least equal to the relevant National Minimum Wage rate, and the gross pay is subjected to PAYE tax and Class 1 NICs
   • the employee personally pays travel and subsistence expenses from net earnings
   • the employee may make a claim for a deduction from earnings in respect of personal expenditure that is eligible for a deduction
   • no NICs relief is available.

HMRC is seeking to identify those businesses that are currently operating “payday by payday relief” models.  Individuals or businesses can provide HMRC with details, in confidence, about such businesses by using the email facility on the HMRC website.

Further information:

Statement by HM Revenue & Customs – Pay day by pay day tax relief models

Tags: NICs, payday by payday tax relief model, PAYE, Recent Payroll News, tax relief

This entry was posted on Sunday, July 17th, 2011 at 08:35 and is filed under Tax Relief. 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.