Some recruitment agencies and umbrella companies might want to ditch a new business model for travel and subsistence payments if they’ve recently adopted it, following a warning from HMRC.
Under the new model, known as ‘pay day by pay day’, employers can apply National Insurance and Income Tax relief each pay day to any travel and subsistence expenses incurred by their employees. In these revenue-squeezed times, HMRC’s gimlet eyes have not failed to detect what this means: NI and Income Tax then only become payable on the balance. This is a feature that Her Majesty’s Revenue and Customs are not at all keen on.
It is a bit more serious than simple dislike for any PAYE umbrella outfit that has adopted the model – HMRC insists that the scheme fails to comply with two important bodies of statute: the Taxes Act and the Social Security Act. All Income Tax liabilities must be calculated over the course of a year to remain compliant with tax law and the ‘pay day by pay day’ model conspicuously fails to do this.
Furthermore, where employees pay travelling expenses out of total income, the Social Security (Contributions) Regulations of 2001 prohibits deductions from earnings. So as not to appear entirely resistant to innovation, HMRC has announced that it will consider a different business model that enables employers to pay subsistence and travel schemes to employees in cash so long as the latter pay a ‘financial advice payment’ back to the employer.
A tax expert from the accountancy firm Saffery Champness advised that businesses which employ others could find themselves under heightened scrutiny if they use the ‘pay day by pay day’ model and face the unwelcome rigours of a formal investigation.