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HMRC clampdown on pay day by pay day umbrella expenses abuse
Posted Jul 23, 2011
HMRC has published further guidance to prevent unscrupulous umbrella companies from offsetting expenses against National Minimum Wage payments to their employees.
Earlier this year, HMRC stated that there were umbrella schemes in operation which claimed to provide 'savings' for employers, whilst still complying with the National Minimum Wage (NMW) regulations.
Such 'savings' would typically be achieved by paying workers subsistence expenses rather than travel expenses, under-recording the number of hours worked, and even classifying employees as directors.
Pay day by pay day clampdown
Now, HMRC has issued a new statement on 'pay day by pay day' operations, the latest type of umbrella scheme which seek to circumvent the National Minimum Wage rules.
Under such arrangements, employers apply income tax and National Insurance contributions relief to the amount of expenses that an employee has incurred, so that tax and NICs are applied to an employee's gross salary after these deductions. This relief is applied each pay day, hence the term.
Of course, the pay day by pay day model results in a tax and NIC shortfall to the Treasury. Additionally, it is up to HMRC to apply any tax deductions at the end of the tax year. There is no statutory framework in place for employers to process tax reclaims of this nature.
Although pay day by pay day arrangements are unlikely to apply to higher-paid contractors, the issue does highlight how important it is to choose your umbrella provider with care.
No HMRC worries for scrupulous umbrella providers
The FCSA, which represents some of the largest umbrella providers in the UK, says that all of its members are required to pay their employees the NMW, and not to offset expenses against this amount.
Stuart Davis, chairman of the service providers' group, commented:
"Our view is that if the umbrella provider ensures that its employees are paid at or above NMW after deduction of travel and expenses payments then they should not be affected by further HMRC scrutiny.
"We welcome any moves by HMRC to look into any business models which have been constructed with the intention of operating contrary to the intention of Parliament. They have no place in the service provider industry as they do not help their clients in either the short or long term."
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