Staffing agencies are being advised to ensure that their contracts with Umbrella Companies are strengthened to avoid potential claims from HMRC for subsistence and travel expenses following a recent tax tribunal ruling.
Recruitment agency Reed this week failed in its appeal against an earlier ruling that it was liable for up to £158 million in unpaid tax and NICs on subsistence and travel claims made by its Umbrella Employees. Between 1998 and 2006 the recruiter had paid a portion of these workers’ salaries as non-deductible expenses for travelling to work; the rest of the salary had tax and NICs deducted.
The upper tribunal upheld the earlier ruling that subsistence allowances should have been included as part of the total salary, with tax and national insurance deductions duly made, despite Reed’s argument that the Revenue had originally permitted zero deductions on these allowances.
Legal expert Kevin Barrow, a partner at the law firm Osborne Clark, said that the key test for liability in the light of this ruling was whether Umbrella Employee contracts run between assignments. In the absence of this arrangement, HMRC agents are likely to assess staffing agencies as liable for tax and NICs on subsistence claims.
Mr Barrow urged recruitment agencies to review their contracts with Umbrella Companies to strengthen the between-assignments measures that function as a form of legal ‘glue’ between worker and employer.
His views were shared by David Heaton, tax partner at accountancy firm Baker Hill, who said that links between recruiters and Umbrella Employees should be demonstrably strong, even if a retainer no higher than the minimum wage was paid between assignments.