In part two of our blog series, we continue our look at the recent First Tier Tribunal case which has been causing a stir amongst umbrella companies, assess what lessons providers can learn from the findings, and examine what it means for contractors.
In our last blog [link], we looked at several salient points which providers would be wise to bear in mind as a result of the Tribunal’s findings. This time, we examine what umbrella companies must get right in order to remain compliant.
Intention to carry out future engagements
Determining the fundamental differences between temporary and permanent assignments is vital to a contractor’s tax status.
In order for them to claim that they are in fact working under the overarching employment of their chosen umbrella, they must confirm that they intend to carry out multiple assignments for their provider – only under these circumstances, and where they are outside of SDC, can their workplaces potentially be assessed as temporary.
If they do not have this intention, and only propose to carry out a single assignment during their employment, then that workplace would be deemed as permanent for tax purposes.
Their intention to carry out future engagements is usually declared on individual expense forms as part of the claiming process, and it must be made clear.
Optional Remuneration Arrangements
Optional Remuneration Arrangements (OpRA), which were introduced in 2017, mean that workers are no longer allowed to give up any right of pay for tax-free benefits. This adds to the complexity of the situation and, in the case of umbrella companies, threatens the legitimacy of the mileage expenses-only model.
In order for an umbrella company to continue to operate a mileage-only expenses policy, they were required to change how they defined pay for their workers within their employment contracts. Unusually, there are still some providers that have failed to address this required change, and still continue to pay expenses in this way.
Other providers operate what’s known as a ‘fixed expenses pot’ process. This was originally designed by Professional Passport and agreed with HMRC, on the basis that very strict requirements were met. In theory, it simplified many of the rules around which expenses workers could claim and how they went about claiming them. However, its practical application proved to be difficult and there was the risk of workers losing money as a result.
Professional Passport, therefore, no longer accredits companies which operate this process, however it is aware of other providers still operating in such a way. Questions remain as to whether they are meeting the specific requirements of HMRC to be fully compliant, and workers must establish if their intended umbrella partners operate in this manner.
A further area which bears investigation, and which was not discussed in the recent Tribunal case, is agency reimbursed expenses. Professional Passport notes that many providers are not operating a correct policy with regards to this practice, which could lead to future challenges by HMRC.
Impact on Workers
What does all this mean for workers?
In many cases, it will have no impact whatsoever.
The umbrella company is entirely responsible for the correct application of PAYE on its workers’ behalf, and, if challenged by HMRC, it is the umbrella company that is liable.
Workers may find that in their contract there is a clause stating that the umbrella has the right to pursue them if additional taxes become due, but the reality of the situation is that most workers’ expenses are relatively small, the tax due is minimal, and HMRC would likely be unable to recoup the full amount of tax if the cases were taken to court.
However, it is the workers’ responsibility to make accurate claims. If they were found to be making false or inflated claims, they may be open to repay the full amount of the falsely claimed expenses, as well as the legal cost of that recovery, which could be a substantial amount.
As ever, it is vital that workers partner with a compliant umbrella company that will act in their best interest and work within the law. Contractors looking for an approved umbrella provider can find out more information through the Professional Passport website.