A tax loophole allowing agencies to pay wages as “expenses” has caused loss of business and widespread indignation in the agricultural labour sector as tax “cheats” put pressure on suppliers and other agencies alike.

The employment agency tax loophole is being exploited to boost profits in agencies at the expense of workers and their employers.

The “salary sacrifice schemes” reduce the level of temporary workers' wages that are subject to tax. They voluntarily sacrifice part of their pay and then tax and national insurance are calculated on the remainder before they are reimbursed through non-taxable expenses.

The schemes, which are often known as travel and subsistence or mobile worker schemes, were initially set up to benefit self-employed contractors but they have now become prevalent with labour providers, making it compulsory for their minimum wage workers.

But the use of the schemes has caused consternation elsewhere in the sector as it has put pressure on other agencies and drawn suppliers toward the cheaper option.

Reports claim agencies could be saving as much as 50p a worker per hour, with only 10-15 per cent of the benefit passed on to the temporary workers as well as reduced rights in relation to building up a pension, jobseeker's allowance and future tax benefits.

The Gangmasters Licensing Authority (GLA) has reacted strongly by clamping down on those gangmasters and umbrella companies who abuse the tax-free allowances for workers as a method of undercutting rivals.

The authority has issued a 12-week warning to comply before enforcement action begins. If labour providers and umbrella companies do not heed this warning, the GLA will take action from February 17, 2010.

Also, where non-compliance is proven, in addition to GLA action, HM Revenue & Customs (HMRC) will take action to seek arrears of tax, national insurance and national minimum wage, with penalties and interest also being sought where appropriate.

Andy Hogarth, chief executive of Staffline, told freshinfo: “We came across this last year when we began to investigate how our competitors were vastly undercutting us.

“In effect, both the temporary workers and the agencies’ clients are being ripped off as they should be seeing the benefit if they are going to use the scheme. The workers are marginally better off in terms of money but received none of the National Insurance benefits.

“Some of our clients have said, as it had not been shut down by the GLA and HMRC before now, that they wanted us to start doing it as they are under huge pressure from the retailers at this time but have said we think it is illegal, and we have lost business as a result.”

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.

Guidelines from the Department for Business, Enterprise and Regulatory Reform's 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."

Paul Whitehouse, chairman of the GLA, said: “We have issued clear guidance, and the industry has been given 12 weeks to ensure they comply. There are no excuses and we will come down hard on anyone who is operating illegal schemes from February 17, 2010”.

HMRC said it had “commenced action” in identifying contravention of tax, national insurance or national minimum wage legislation, while the possibility of legal challenges from companies operating the schemes was described as “highly likely”.

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