HMRC close the net on NMW abuse

Regular readers of our “Tax Insight” bulletins will be aware of the long established principle that any arrangements surrounding tax efficient structuring of pay must ensure that employees still receive National Minimum Wage (NMW), charged to tax and National Insurance (NIC) through the payroll.

Despite this principle being reinforced from the 1st January this year through the NMW (Amendment) (No.2) Regulations 2010, a small number of third parties have continued to promote arrangements where employee pay is reduced below NMW through the payment of tax and NIC free travel expenses. These so called “pay day by pay day relief models” seek to establish that pay for NMW purposes is still provided, but an element of this pay represents deductible travel expenses and therefore can benefit from tax and NIC ‘relief” when it is paid.

This week, HMRC published additional guidance clarifying that the model described above does not comply with the Taxes Acts or Social Security Acts and associated Regulations and that they are actively seeking to identify employers sponsoring or supplying such a model to workers.

Is HMRC correct?

In our opinion, such models have never worked as there is no statutory framework for employers to claim tax relief on behalf of the individual. When pay is provided for deductible travel payments which can be claimed, for example, under Section 338 ITEPA 2003 such claims can only be claimed by an individual against their total income for the year of assessment once the tax year is complete.

A similar issue arises in respect to NIC. The Social Security (Contributions) Regulations 2001 provide that payments made by the employer to the employee to cover certain travelling expenses incurred by an employee can be disregarded from the employed earner's employment for the purposes of earnings related contributions (i.e. where such payments are made, those payments will not count as 'earnings' for the relevant earnings period). However, the relevant legislation does not provide for a deduction from the amount of that employee's earnings where the employee meets the travelling expenses out of total income/earnings.

Conclusion

If you are an employer paying “pay day by pay day relief” then you should be preparing for a visit from HMRC very shortly and significant consideration should be given to changing your business model with immediate effect.

If you are an agency or “end user” utilising the services of an organisation which operates the “pay day by pay day relief” model then immediate consideration should be given to the potential financial risk arising for your business where suitable protective arrangements are not in place. Even where no actual tax and NIC risk arises on your business, the reputational risk of being associated with such arrangements will clearly impact both your risk rating and profile with HMRC and immediate action should be taken.

Should you have any queries then please do not hesitate the Cobia team on 0845 226 0580.