In a typical agency situation, the agency will supply you to an ‘end client’. You will usually perform tasks under the day-to-day supervision of someone at the end client location but will send time sheets to the work agency, who will pay you.
Technically, you are usually neither an employee of the end client nor of the agency, however under a special rule, the agency is responsible for deducting income tax and National Insurance contributions (NIC) from the salary paid to you. They must also pay employer NIC. This is a cost to the agency, but it is usually covered in the fee that is charged to the end client by the agency.
Furthermore, even though you may work on lots of different engagements and may incur substantial travel costs in getting to your various work locations, another special rule says that agency workers are not normally entitled to tax relief on the travel and subsistence expenses they incur.
Ways of side-stepping these rules have been developed over time. However HMRC do not like the type of arrangements that have been developed as they mean that they are not always getting the tax and NIC that they could do. It is important to be aware of them, because it may be the case that HMRC will come after you for any unpaid amounts if you are using an arrangement that they do not like.
In recent years, some agencies have been trying to avoid having to operate Pay As You Earn (PAYE) for workers – this means that their costs are reduced.
They do this by saying (or by using arrangements that say) that the worker is ‘self-employed’, so that the worker has to pay their tax and National Insurance to HMRC themselves and there is no employer National Insurance to pay.
However, treating a worker as ‘self-employed’ when they should actually be treated as an ‘employee’ leaves the worker in a vulnerable position and means that the Government is losing money. Since 6 April 2014, the Government have tightened up the rules to prevent ‘employment intermediaries’ (agencies and other businesses involved in the supply chain), from being able to do this so easily. The rules essentially say that the only time an employment intermediary can escape operating PAYE is where the worker is under NO supervision, direction or control by the end client.
It is unlikely that you would be under no supervision, direction or control. It may be tempting to turn a blind eye if PAYE is not being operated on your wages, as this may mean lower costs for you too. However unless you are genuinely self-employed, it is best to tell the business paying you that you want to be dealt with under PAYE, so as to protect yourself from any problems with HMRC later down the line.
You should be aware that recently, a variation of this arrangement is being used in the temporary worker industry. This ‘hybrid’ variation sees you being treated as an employee for tax purposes (so that PAYE is operated as is required under law) but you being treated as self-employed for all other purposes. Self-employed people do not have the rights and protections that ‘workers’ have (agency workers are ‘workers’ for employment law purposes and as such are entitled to basic protections, such as being paid at least the National Minimum Wage (NMW) or National Living Wage and working time entitlements such as paid annual leave).
This saves the employment intermediaries concerned money, just in different ways, however is unlikely to benefit you in any way at all. As such, you should think very carefully about accepting such terms and conditions.
Important information about agency workers working through an ‘umbrella’ company
Sometimes an agency will offer you the chance to work through an umbrella company. An umbrella company is an employment business that acts as an ongoing employer to agency contractors. Thus, if you are working through an umbrella company, you are normally treated as an employee of the umbrella company.
In this situation, the end client pays the agency for your work. The agency takes its fee and then passes the balance on to the umbrella company and the umbrella company then pays you under PAYE.
Having a ‘core’ employment with an umbrella company means that the various end user client sites turn into ‘temporary workplaces’ under special tax rules and means the expenses of travel to those workplaces from home (amongst others) might, in limited circumstances, be allowable against tax.
Therefore umbrella companies often pay their employees a basic wage (which should be at least the National Minimum Wage (NMW) or National Living Wage (NLW), as appropriate) and an amount of reimbursed home to work travel expenses. As the reimbursed travel expenses might not be subject to tax or NIC, both the umbrella company and the employee can save money.
New restrictions on travel and subsistence claims if you work through an umbrella company
HMRC do not like umbrella arrangements because the temporary workplace rules are being used in a way that was never intended. In addition, some umbrella companies do things like claim tax relief on inflated or fictitious expense amounts or in circumstances where the relief would not be due (for example where you do not intend to take multiple assignments or where it is a ‘temporary to permanent’ position). Others may give you tax and NIC relief on travel expenses that you pay yourself out of your minimum wage rather than on reimbursed expenses which HMRC say is illegal.
Because of this, since April 2016, there are rules that mean that if you work through an umbrella company, you are unlikely to eligible for relief for travel from your home to your temporary workplaces.
The rules say that relief for home to work travel and subsistence expenses is restricted where a worker:
- personally provides services to another person
- is employed through an employment intermediary (such as an agency or umbrella company)
- is under the supervision, direction or control of any person.
The rules make it harder for employment intermediaries to claim tax relief on home to work travel and subsistence expenses, meaning their costs will go up and your take home pay will go down.
To get round this, some unscrupulous businesses may try and say that you are not under the supervision, direction or control of any person (which would be highly unlikely unless you are genuinely self-employed) or try and make you work through the ‘hybrid’ model referred to above or even try and set up a ‘Personal Service Company’ for you.
This is a one person Limited Company which in some circumstances, may not be caught by the new rules restricting travel and subsistence relief. However due to the responsibilities and obligations associated in running one, providing your services through a limited company may be totally inappropriate for you and leave you with messy compliance issues to clean up for years and years. There is information on running a limited company on GOV.UK.
You should be extremely wary of businesses that try and get around the new rules on travel and subsistence. You may even decide to report them to HMRC so that their practices can be investigated.