13.06.11 Letter to Employment Relations Manager Ed Davey

We have today issued the following letter to Employment Relations Manager Ed Davey in support of our contention that both HMRC and the GLA have misinterpreted the current legislation in an attempt to block low-paid workers from claiming tax relief on a “Pay As You Go” basis.  We will keep you updated on any developments.  Why not follow us on Twitter @AspireBusiness .

10 June 2011

Mr Ed Davey
Minister for Employment Relations
Department for Business, Innovation and Skills
Number 1 Victoria Street
London
SW1H 0ET

Dear Mr Davey

Low - Paid Workers – Travelling and Subsistence Expenses

I am writing to you as a professional business adviser who regularly provides advice to Temporary Work Agencies (“TWA’s”) and Umbrella Companies (“Umbrellas”) on the following key areas; 

               ·          Technical matters relating to PAYE and National Insurance Contributions (NIC’s), 
               ·          National Minimum Wage (NMW), 
               ·          Working Time Regulations (WTR) 1998, 
               ·          Wages Act 1986, 
               ·          Conduct of Employment Agencies and Employment Businesses Regulations 2003, 
               ·          Agency Worker Regulations (AWR) 2010 
               ·          Gangmasters (Licensing) Act 2004

Background

I am extremely concerned that HM Revenue and Customs (HMRC) is erroneously preventing low-paid workers from claiming relief from PAYE and NIC’s on qualifying business related expenses with particular relevance to the industry sector regulated by the Gangmasters Licensing Authority (GLA). 

The matter in question relates to the legitimacy of a new payroll calculation operated by TWA’s and Umbrellas which aims to provide relief from PAYE and NIC’s on such expenses, on an earnings period basis, rather than making a formal claim for relief via HMRC following the end of an income tax year.

By providing relief in this manner, low-paid workers receive a “cash-flow” benefit for an expense which is not paid or reimbursed by the employer which satisfies strict criteria laid down in legislation to provide for such relief.

National Minimum Wage

I was delighted to read your announcement that the Low Pay Commission will consult and make recommendations on whether the NMW regulations can be made even simpler and easier to administer. I would also be delighted to feed into this process.

I also fully endorse your comments as reflected below;

“The Government is committed to the National Minimum Wage as it provides the much needed protection for low paid workers and encourages those out of work, back into the labour market”.

In order to incentivise individuals to take low-paid jobs, publication of the fact that such workers can claim relief from PAYE and NIC on qualifying business expenses on a “pay as you go” basis could be enough to encourage them to take jobs which lie outside of their home location resulting in a net overall reduction in cost to Government.

Gangmasters Licensing Authority

It is clear from briefing documents issued by the GLA that HMRC is currently advising GLA Officers in matters relating to the Licensing Standards. These briefing documents describe the above payroll calculation as a “de-facto salary sacrifice scheme” and the method of providing relief “ultra-vires”.

It is my opinion that such action can best be described as “propaganda” i.e. aimed at influencing the attitude of the sector by using the threat of withdrawal of the operating licence as a “stick” to beat any business which considers the option to be a viable alternative to the reimbursement of expenses.

I have yet to see a paragraph of technical analysis from either HMRC or the GLA to substantiate such a use of Latin terminology despite repeated calls for them to do so. I understand that five months of analysis, undertaken by at least four HMRC “specialists”, has already taken place.

In addition, I have recently been advised by an Officer in the Policy Division of HMRC that he is “currently in discussions with colleagues on this issue and hopes to be in a position to revert back shortly”.

On the face of it, both departments appear committed, at all costs (including litigation), to prevent a legitimate cash-flow benefit from arising for low-paid workers. I consider this attitude to be irrational, unfair and discriminatory.

Key Aims of the Payroll Calculation

In order to consider this matter further, it is worth pointing out the key aims of the payroll calculation which can be described as follows;          

        ·         to provide a mechanism whereby low-paid employees are able to claim expenses earlier than they would have been able to do so via HMRC at the end of the tax year,
·         to ensure that “exploitation” of such employees is avoided through the use of unfair salary sacrifice schemes which retain part of the sacrifice,
·         to ensure that employees are fully informed of what types of expense can be claimed as a business related expense,
·         to ensure that employees tax affairs are maintained through a clear and unambiguous supply of information,
·         to ease the burden on HMRC in processing expenses claims via self-assessment and,
·         to consider proposals put forward by Government on the simplification of PAYE into a “real-time” system

Technical Analysis

You will no doubt be aware that low-paid workers are precluded from participating in salary sacrifice schemes which reduce earnings in lieu of the receipt of a payment of expenses as a consequence of the judicial review hearing between Cordant PLC v Secretary of State for Business, Innovation and Skills and HM Treasury. The outcome of this case introduced Regulation 31(1)(j) into the NMW Regulations 1993 and become effective from 1 January 2011.

The aim of the new regulation was to prevent TWA’s and Umbrellas from exploiting low paid workers by operating a scheme in a manner which resulted in the worker being marginally better off whilst the employer benefitted significantly. For reference purposes, the new regulation contains the following wording;

“any money payments paid by the employer to the worker in the pay reference period in respect of travelling expenses that are allowed as deductions from earnings under s338 of the Income Tax (Earnings and Pensions) Act 2003”

The payroll calculation subject to consideration does not involve a salary sacrifice scheme or a payment of expenses made by the employer and will, therefore, not be in contravention of the NMW Regulations. In fact, there are no charges made by the employer to the worker to participate in the payroll calculation and the worker receives the full benefit of the relief.

The manner in which relief is provided is also supported by the following legislation, HMRC internal guidance and decided cases including comments made by Parker J in Cordant; 

Conclusions

It seems incomprehensible for HMRC, the GLA or a coalition between the two Government departments to enter into litigation in support of an incorrect and untenable interpretation of existing legislation in a way that is without doubt unfair to the poorest most vulnerable workers in our society and is in direct contradiction to Government policy in this area.

I fully appreciate that you are not the Minister responsible for HMRC or the GLA but as the Employment Relations Minister, you may be interested to learn of the unsupported interpretation of legislation which is being used to deny the right of a low-paid worker to claim relief in the manner so described.

I would urge you to take this matter up with your Ministerial colleagues and consider further making the GLA more accountable for its actions by merging this draconian department with the excellent Employment Agency Standards Inspectorate (EASI) which is committed to compliance through education.

I have taken the liberty to forward a copy of this letter to the Director of Strategy at the GLA and the HMRC Policy Advisor responsible for employment businesses, labour providers and intermediaries.

I have also made the letter available on my web-site at www.aspirepartnership.co.uk in the event that TWA’s and Umbrellas wish to forward their comments on this issue direct to you.

I very much look forward to receiving your thoughts in due course.

Yours sincerely

Alan Nolan
Senior Partner
Aspire Business Partnership LLP