Update on Travel Expenses and Travel Schemes

i-Paye tax expert Paul Hughes has confirmed that HMRC has scrapped plans to re-examine tax and national insurance relief available to individuals attending a temporary workplace as part of their employment with an Umbrella Company.

However, consultation documents have been issued to remove the lowest paid workers from being forced in to travel schemes by agencies as a means of reducing the overall cost of employment.

Under the current definition travel to and from a temporary workplace is treated as contributing towards the National Minimum Wage.  The proposal is simply, to amend this definition so that the travel costs are excluded when comparing the amount paid to the relevant National Minimum Wage for that worker.

The combined consultation (HMRC, BIS and GLA) proposes an implementation date of 1 October 2010.

HMRC and BIS at the same time have noted that in some cases the internal processes and deduction made as part of the travel scheme set up may be illegal.  In some extreme examples the offset of expenses leads to no National Insurance contributions which can cause problems in between contracts and a major loss to the exchequer.

Paul says: ‘So what does this mean? At present a Travel Scheme can pay a combined amount salary and expenses that together must equal the National Minimum Wage, in addition the worker is entitled to accrued holiday pay.  If an Umbrella Company is also involved then a typical fee would be £20.00.’

For example:

Hours worked 40.00 hours x £5.93 = £237.20

Paid as:

£110.00 - salary
£127.00 - expenses

Costs:

£28.63 - holiday
£0.00 - employers NI
£20.00 - service charge       

Total: £285.83 or £7.15 per hour

Many schemes do not take account of the holiday entitlement and deduct the fee from the workers net pay.  Both practices could lead to future claims through an ETA or class action being brought.

Also, many schemes do not provide workers with sufficient information and rely upon their ignorance of their entitlements.

From 1 October 2010 assuming the regulations are passed the above example would change as follows:

Hours worked 40.00 hours x £5.93 = £237.20

Paid as:

£237.20 - salary
£127.00 - expenses

Costs:

£28.63 - holiday
£19.95 - employers NI
£20.00 - service charge

Total: £432.78 or £10.82 per hour

In reality many of these schemes will close down, with the worker reverting back to PAYE, with no expenses, which would equate to a cost of around £7.14 per hour plus payroll costs.  Umbrella’s that remain will need to set a minimum rate to ensure NMW compliance.  We would anticipate a minimum rate of £8.15 per hour.

Hours worked 40.00 hours x £5.93 = £237.20

Paid as:

£237.20 - salary
£30.00 - expenses

Costs:

£28.63 - holiday
£19.95 - employers NI
£10.00 - service charge

Total: £325.78 or £8.15 per hour umbrella

Clearly many agencies operating at this lower end of the market may need to prepare clients for increased billing requirements and that as the NMW increases each October that the billing rate will need to track the uplift.

So, is that the end of expenses for the lower paid? The change in the regulations for the National Minimum Wage, at present, does not change the ability for some low paid workers, who attend multiple sites either on behalf of their employer or under their employment with the umbrella, to offset (for tax purposes only) their travel costs to and from temporary work sites through either a claim to HMRC or their annual self assessment.

For the first time ANYWHERE, contractors, freelancers and self-employed professionals can choose an umbrella service for their pay which truly fits.

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