Employment agencies use workers' tax allowances to boost profit

Employment agencies are exploiting a loophole in the taxrules to take advantage of low-paid workers' tax-free allowances, allowing them to improve their own profits rather than pass on the full benefit to employees.
Tax experts say the agencies could be saving as much as 50p a worker per hour, with only 10-15% of the benefit passed on to the temporary workers.
In sectors such as food processing and manufacturing, margins for employment agencies are often as low as 80p to £1 a worker per hour, giving those agencies who exploit the loophole a distinct advantage. Competitors who question the legitimacy of the practice claim it is distorting the market.Industry figures are calling on HMRC to clarify the situation. Andrew Gilchrist, managing director of multi-sector recruiter Interaction, said: "Someone needs to come out and say whether they are legal or illegal. It's an abuse; the exchequer is losing out and UK workers are losing out."
The schemes reduce the level of temporary workers' wages that are subject to tax. They voluntarily sacrifice part of their pay: tax and national insurance are calculated on the remainder and they are reimbursed through non-taxable expenses.
Mike Cooper, director of Best Connection, a national supplier of temporary workers, said: "More and more companies are using the tax-free allowances of individual workers not to benefit them, but to fund their own business and enable them to offer reduced and unsustainable margins."
A spokesperson for Northern Foods, which makes Marks & Spencer ready meals, Fox's biscuits and Goodfellas pizzas, said the company is aware that one of the agencies it uses has adopted a salary sacrifice scheme, but that the company makes no financial gain.
The debate about the legitimacy of the schemes rests on whether the expenses paid by the employer have genuinely been incurred by the worker, and whether paying national insurance and tax on an amount that is less than the national minimum wage is legal.
In many cases receipts do not have to be produced by the worker to prove the expenses were incurred, because HMRC has granted dispensations allowing the payment of fixed-rate allowances for things such as travel and meals.
Lesley Fidler, tax director at accouar £93 worth of travel that week?"
Proponents of the schemes point out that the workers involved receive more take-home pay. Marie Samuels, employee and temp benefit manager for gap personnel, said: "We went into these schemes because the larger agencies [which are already using them] go into the market and set the margins. It's a win-win, we can compete for business, the temp has an increase in wage and obviously we get savings ourselves."
But reducing the size of an employee's national insurance contribution could also have an impact on their access to contributory tax benefits, such as pensions and jobseeker's allowance.
A spokesperson said HMRC has "commenced compliance activity to identify and take action against those employment businesses and umbrella companies which are operating in contravention of tax, national insurance or national minimum wage legislation".
The Department for Business, Enterprise and Regulatory Reform's guidelines state: "If you refund money to a worker, which the worker has spent on something to do with their job, the refund does not count as national minimum wage pay."