How proposed Travel and Subsistence legislation could create unscrupulous payroll models
One thing is for sure, whenever HMRC comes up with new tax or employment legislation, there's always someone out there who will try to find a way around it, no matter how much of a grey area it takes them into. We've seen payday by payday models, managed service companies and elective deduction models. And we don’t expect T&S to be any different.
Our founder, Rob Crossland, explains some of the less than compliant payroll models to give you an idea of what you should steer clear of.
The risk of dodgy alternative methods
With added scrutiny on the contractor market around travel and subsistence, it will pay to get your supply chain in order from a compliance point of view and ensure you’re avoiding these kinds of schemes, especially at a time when company reputation is already high on the media agenda.
If you’re facing a loss in your revenue stream, you might be tempted to consider alternatives. By doing this you could be hit harder, face potential fines and a damage relationships with your end clients.
Elective deduction model
With this model, the worker is deemed to be self-employed but chooses to pay tax and National Insurance as if they are employed. Seems OK, right? HMRC is getting the contributions it’s supposed to. But the employee doesn’t receive statutory employment rights that would normally go hand in hand with paying full taxes. They're also not necessarily eligible for National Minimum Wage, so it offers little protection to employees and creates huge potential risks to recruitment agencies and end clients.
Managed Service Company Legislation
Introduced in 2007, this piece of law prevented the use of artificial company structures by having the power to pass on tax debt to directors of providers and even recruitment agencies. Managers of “composite companies” were targeted and many went out of business with others having to wholesale re-engineer their businesses.
HMRC deemed that grouping un-related workers together and aggressively managing tax and IR35 status was more akin to deemed employment. This legislation is still in place today and agencies need to ensure that no new models are recreating the past.
Payday by payday model
When businesses have employees at or just above the National Minimum Wage, they sometimes choose to breach it by removing holiday pay or other benefits, or they remove/ reduce Employers’ National Insurance.
They use travel and subsistence schemes to top the employee up via tax relief to compensate. It basically means that their pay isn’t reimbursed, but instead used to reduce tax and National Insurance so the full National Minimum Wage isn’t paid often without the workers knowledge.
Offshore tax avoidance schemes
There’s always plenty in the new about dodgy tax avoidance schemes, with celebrities like Gary Barlow and Jimmy Carr coming under fire for using offshore schemes. These schemes are always very complex but are coming under increasing scrutiny from HMRC, so unless you’ve put enough away to pay off the eventual fines, they’re probably best avoided.
Sometimes it’s not so much a case of people looking for aggressive tax avoidance schemes. They just aren’t aware of what’s right and wrong. I’ve seen a recent example of teachers operating through a limited company – everyone involved genuinely had no idea that this shouldn’t be happening.
With the heightened media interest around company wrongdoing, it definitely pays to be aware of what your employee supply chain is up to. After all, the ex-VW boss couldn’t claim to be in the dark about what was going on at his company. And now they’re facing huge losses and lawsuits. So rather than finding yourself at the centre of an underpaid employee scandal, make sure you know exactly what payroll models all workers are on so you can sleep soundly at night!