Traditionally umbrella companies have structured the contract and payslip based on National Minimum Wage (NMW) + a discretionary bonus. The pay is structured in this was to limit umbrella companies exposure to non-payment and to ensure that they meet NMW requirements. This has also enabled some umbrella companies to allow qualifying employees to claim tax relief on main site travel and subsistence costs. Our partners at Brookson have written this useful article on the changes to umbrella expenses after the Coronavirus job retention scheme ends.
In 2016 there was a legislation change which meant that only umbrella employees who aren’t under the supervision, direction or control of the end client were allowed to claim tax relief on these types of expenses. The introduction of the Optional Remuneration Arrangements (“OpRA”) legislation in 2017 resulted in a further restriction on availability of tax relief on these expense claims as they could no longer form part of a salary sacrifice scheme. Umbrella companies paying NMW plus a discretionary bonus were not sacrificing salary in exchange for tax free expenses so were not caught by this rule change.
These rules and contractual structures have worked for the majority of umbrella companies until the recent pandemic and the introduction of Furlough. Based on the above contractual agreement only the NMW part would be allowed in the calculation of payment under the Coronavirus Job Retention Scheme (“CJRS”). Many umbrella companies have recently tested the discretionary nature of their pay and concluded it is not discretionary at all and therefore able to be included in the calculation of the CJRS grant payment.
What does this mean for expenses? That is a question that most people have ignored and is a very important one!
Due to clarification of the discretionary element of the pay (i.e. it is not discretionary), the payment of tax free reimbursement of travel and subsistence costs is no longer available to umbrella companies who have based their CJRS grant claim on 80% of the full salary as they would breach the OpRA rules. If they argue were to argue that the NMW + Discretionary Bonus construct is correct then they would be flouting the rules of CJRS and likely have to repay this as the government look to crack down on non-compliant furlough claims. Essentially you can’t make a different argument about the discretionary pay element when considering expenses and the CJRS scheme.
As a recruitment agency you need to make sure your supply chain is compliant and financially robust. Any of your current umbrella companies who have made payments to furloughed employees based on 80% of the full earnings and who continue to reimburse tax free travel and subsistence expenses risk HMRC investigation and financial loss and are also exposing you and your business to risk under the Criminal Finance Act.
The additional benefit to the worker when making this change is simply that their entire payment (less employment costs) will be classified as a salary and therefore remove the common dissatisfaction of contractually only being entitled to NMW. This will also help contractors when applying for credit such as mortgages & loans.
PS, you might also like to check out this blog that looks into the googles most searched IR35 questions which Brookson have attempted to answer: https://www.brooksonlegal.co.uk/news/answering-googles-most-searched-terms-for-ir35/
