The government could be close to making an announcement on travel expenses for workers who work through umbrella companies or who are directly employed by agencies on overarching contracts of employment.

Recruiters were anticipating an announcement on whether tax breaks for these workers should be abolished in the Chancellor’s Pre-Budget Report (Monday, 24 November).

The government has long found it an anomaly that these workers have been able to claim tax relief on travel expenses/subsistence to and from work — a benefit that other temporary workers do not enjoy. The government also believes this preferential treatment has been abused by some umbrella companies and agencies.

Following a recent government consultation with stakeholders, including recruiters, trade bodies and managed service providers, Kevin Barrow, partner at employment law firm Blake Lapthorn, which was involved in the consultation, told Recruiter that the Pre-Budget Report will “provide clues” about the government’s intentions.

The consultation document, which offered stakeholders three options: keep the status quo, abolish the tax relief or introduce legislation to tackle non-compliance, said: “[The government] is particularly concerned at evidence that umbrella companies and employment agencies using overarching employment contracts often abuse the travel expenses rules, by encouraging their workers to claim expenses which were not genuinely incurred or for which no relief is due.”

Stuart Neilson, a partner in the employment and pensions department at law firm McGrigors, explained: “At the moment, if you work as a direct employee of an agency on an overarching contract of employment/guaranteed hours contract (which links a series of separate agency assignments, into a single, ongoing period of employment), this entitles you to claim subsistence and travel expenses from every location you work at.”

The way this works is that instead of the agency paying staff £100 that is taxable, they pay them £95 which is taxable and £5, which represents the travel expenses, which is tax and National Insurance Contribution free, said Neilson. The £5 is often paid by means of a salary sacrifice scheme.

“It’s a way for staff to get more money in their back pockets and the Revenue thinks it’s a bit of an abuse,” he added.

According to Neilson, the existence of this tax break is “a big motivating factor” for agencies employing people directly.

Indeed, according to an HMRC (Her Majesty’s Revenues & Customs) estimate, at least 225,000 out of 440,000 workers employed by the largest employment agencies are on overarching contracts.

But while the government is determined to clamp down on what it sees as an abuse, not everyone is convinced that its approach is correct.

Barry Roback, managing director of JSA Chartered Accountants, and chairman of the Service Providers Association, told Recruiter: “Contractors, by their nature, intend to engage in a series of different assignments. They are peripatetic and therefore should be entitled to claim travel and subsistence expenses under the circumstances.”

Similarly, Roback argued that where agencies used overarching contracts, the workers were no longer standard agency workers and this entitled them to claim relief on these expenses. “You are giving them employment rights and treating them as an employee, so I don’t see why there are not entitled to get the same expenses as an umbrella,” he said.

Roback argued that in its efforts to create a tax system that treated all types of temporary workers equally, the government failed to appreciate the difference between highly paid contractors, such as those in the IT sector, who tend to work thorough umbrellas, and agency workers who tend to be lower paid.

Roback said that should the government abolish this tax relief, it risked “damaging the mobile workforce, which it has repeatedly said is an asset to the economy”.

Stephen Brewis, head of business standards at Blue Arrow, which directly employs its agency workers, told Recruiter that the current situation benefited both workers and the agency. “Being employed ensures Blue Arrow workers have access to the same statutory benefits as other permanent employees, but with increased flexibility in working arrangements,” said Brewis.

Blue Arrow also participated in the consultation process, which ended on 13 October.

“There may be instances of incorrectly administered schemes in existence, particularly around the fringes of the marketplace, which we will be encouraging HMRC to tackle vigorously to ensure reputable agencies are competing on a ‘level playing field’,” said Brewis in a statement to Recruiter. However, he added: “Properly applied, we think that they benefit all parties and contribute towards the equal treatment of temporary workers.”

However, not all recruiters see the benefits of this tax relief. Andy Hogarth, managing director of Staffline, which directly employs some of its agency staff, told Recruiter that the tax relief gave some temporary workers “an unfair advantage” over people in a permanent job who don’t get the allowance. Hogarth said this was one reason why Staffline had never used the scheme.

Although the government appears unlikely to allow the present arrangements to continue much longer, according to Roback, certain ministers and officials appeared to have “some sympathy with our arguments”.