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£11m tribunal case reveals challenges of ‘umbrella’ contracts

HMRC has recovered £11 million following a dispute with an umbrella company in regard to whether contract construction workers were entitled to claim travel costs tax-free.

Around 600,000 temporary workers in the UK are employed by umbrella companies, according to the latest estimates.

These businesses are used by recruitment agencies and companies to cut temporary payroll costs and help with the management of contract workers.

Exchequer Solutions Limited (ESL) is one such umbrella company that supplies workers to the building trade and the dispute with HM Revenue & Customs (HMRC) was over whether their workplace was permanent or temporary.

The dispute

The issue revolved around whether ESL employed the workers under the umbrella contract of employment continuously while working on various projects, or whether there was a series of separate contracts, with gaps between the employment, where a worker might be temporarily employed elsewhere.

The appeal against HMRC at the First-Tier Tribunal raised the question of whether workers should be reimbursed for travel and subsistence expenses, without being subject to tax or National Insurance contributions (NIC).

What is an overarching contract?

If there is an overarching or umbrella contract of employment, each place of work is a temporary workplace, and the expenses can be paid tax-free.

However, if there is a separate employment contract for each assignment, the workplace is a permanent workplace, and any payments came within the scope of tax and possibly NIC.

HMRC argued that there was no overarching contract of employment so the payments relating to expenses were subject to PAYE income tax and NIC.

The relevant tax years were 2013/14 through to 2016/17 and HMRC issued determinations amounting to a total of £11 million in unpaid taxes and NICs.

ESL claimed there was an overarching or umbrella contract and appealed against the Regulation 80 Determinations and the NIC Notice of Decision.

Following detailed arguments from both, the judge ruled against ESL’s argument.

In conclusion, the Judge determined that the two parties, ESL and HMRC, should agree on the amount of any liability to income tax and NIC based on the amount of the travel and subsistence expenses paid by ESL to its employees.

Deadline set for full hearing

A deadline of 30 November 2022 was set for agreement to be reached at which time a hearing would be organised to finalise the amount of any liabilities.

Link: Umbrella company loses £11m tax dispute over expenses


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