The Gangmasters Licensing Authority (GLA) has won a significant victory in its battle to tackle umbrella companies.

Such companies are sometimes used to evade tax through unlawful travel and subsistence schemes.

The GLA had refused to issue a licence to FS Commercial Ltd (FSC) on the grounds that its “pay-day-by-pay-day” tax-relief model was not supported by any legislation and would take workers’s pay below the national minimum wage.

The FSC appeal against this decision was dismissed in November and the company threatened to challenge that decision at a judicial review. However, the deadline to apply has passed and FSC stated on its company website this week that it has dropped the case.

GLA chief executive Paul Broadbent said: “These circumstances should send a strong signal to any other businesses in our sector considering a similar travel and subsistence scheme, or perhaps operating one already, to have a serious and immediate rethink.

“This is not an isolated example. There are more umbrella-company schemes in our sights like the one FSC proposed. We are already looking into a number of operators we suspect are seeking to gain an unfair advantage over competitors through illegal tax-relief schemes. The GLA aims to provide a level playing field for all businesses so those that choose not to conduct themselves legitimately should expect to come under our spotlight.”

In the FSC case, the company applied for a GLA licence indicating that it proposed to act as an umbrella company that would employ temporary workers before they were supplied to the end client. FSC would then give tax relief on a proportion of the worker’s pay for expenses incurred travelling to and from their temporary workplace.

In doing this, the GLA believed the FSC not only intended to base the employee’s tax and national-insurance (NI) contributions on the net salary total (after expenses were deducted) but would also use the same reduced amount to calculate their employer’s NI contribution for each worker. The resulting saving for the company would have been significant.

Giving tax relief at source in this manner for travel expenses is not supported by any legislation and so breached one of the GLA’s licensing standards. FSC also intended using another company, FSEV Ltd, to offer “help” for workers on reducing tax and NI payments. Each of FSC’s employees would pay a weekly fee to FSEV for the service. Both businesses are owned by Peter Hudson.

The judge in FSC’s appeal agreed with the GLA that this fee would take workers' pay below the national minimum wage, which breached a second important licensing condition and so the licence application was refused.

Broadbent said: “The FSC case sets an important benchmark for subsequent investigations, licensing decisions and court hearings on similar schemes. We will continue to work closely with HMRC and other agencies to ensure a level playing field is maintained and that we do our part to promote national economic growth.”

HMRC was also pleased with the outcome. A spokesman said: “HMRC has clearly set out in two statements published on its website, its view that businesses which apply tax relief and NI relief at source are not compliant with tax and NI legislation. HMRC is continuing to work closely with the GLA to ensure a common aim of a compliant labour provision sector.”