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We’ve seen a lot of change over the course of the year due to the novel coronavirus ‘Covid-19’, and this is prevalent when discussing the contingent workforce. One of these changes is in regards to contractor expenses.

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.

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 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.

With the changes to IR35 coming in 2021, where the responsibility for determining a contractor’s IR35 status shifts from the contractor to the end hirer, we will see even more contractors moving from working within a PSC to an umbrella solution. This will undoubtly see a rise in the use of non-compliant umbrella solutions. We’re recommending all recruitment agencies to stay vigilant when it comes to managing your PSL, and the solutions your contractors use.

For advice on compliance, industry changes and all things contracting, reach out to our experts today.

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