The Government is consulting on proposals to ban tax relief on travel and subsistence expenses for contractors who are under the ‘supervision, direction or control of any person’. Here, we look at the history behind this planned legislation, and the areas of greatest concern to the contracting industry.
Following a number of other legislative changes to clamp down on unscrupulous practices carried out by a number or payroll firms in recent years, within the Autumn Statement 2014, the Government highlighted another problem – the growing use of overarching employment contracts by some service providers, which allow their employees to benefit from tax relief on home-to-work travel, which they would not ordinarily be able to claim.
According to the Statement, the cost to the Exchequer was estimated to be £400m per year from umbrella companies alone.
The growth in the number of workers employed by employment intermediaries over the past few years means that there is now a sizeable proportion of the workforce can claim tax relief for such costs, when traditional employees performing similar jobs cannot.
The problem, according to the Government, lies in the increased use of ‘overarching contracts of employment’ (OACs) – which allow workers to be employed on a single set of terms and conditions, whilst working at different sites, with multiple clients. These different sites can be classified as ‘temporary workplaces’, providing the employee expects to work at any location for less than 24 months.
For limited company workers too, tax relief can be claimed for travel and subsistence expenses if the workplace the director attends is deemed to be of a ‘temporary’ nature.
Ordinary employees in traditional jobs cannot claim tax relief against the cost of the home to work travel (to a permanent workplace), or ‘subsistence’ for their lunch.
This new measure aims to prevent umbrella or limited company employees for claiming tax relief on travel and subsistence, where a traditional employee performing the same type of job, would be unable to do so.
March 2015 Budget
On Pages 61-62 of the March 2015 Budget documentation, the Government announced that tax relief on travel and subsistence expenses will be restricted for umbrella company employees and limited company (PSC) employees who are under the ‘supervision, direction and control of the end-user’.
The Government concluded that the new measure “will level the playing field between employment businesses that seek to lower their costs by using these arrangements and those that do not.”
The document stated that implementation of these new measures would follow a consultation period, and would take effect from April 2016.
July 2015 Budget
Although no fresh updates had been made since the March 2015 Budget, and no mention of the measure made in the Chancellor’s speech itself, a consultation document (available here) was issued on July 8th, seeking views on how the measures should be implemented.
Interested parties have until 30th September to submit their views.
According to the consultation document, the key parts of the proposals are:
To remove tax relief where a worker is:
- supplying personal services,
- engaged through an employment intermediary (umbrella companies, ‘personal service companies’, and some other employment businesses); and,
- is subject to the supervision, direction or control (SDC) of any person.
Supervision, Direction or Control – another test?
It is this last bullet point which stands out. In a similar way to the IR35 legislation, this new measure is intended to hit those workers who have working practices akin to those of a traditional ’employee’.
And, again, like IR35, industry experts are asking how ‘supervision, direction or control’ can be easily defined.
In fact, Seb Maley from Qdos told us: “Whilst not directly related to IR35, it is obviously determined by a status test. Indeed, I can’t see how they will attack travel and subsistence expenses without it being part of an IR35 enquiry.”
Lucy Smith, Sales and Marketing Director for ContractorUmbrella, also commented:
“What needs to be noted is that the test of ‘Supervision, Direction or Control’ also allows for the right of SDC.”
Agency workers vs. professional contractors
If this legislation is aimed at preventing tax ‘abuse’ the lower-paid end of the employment market, what measures will be put in place to protect professional project-based contractors?
Chris Bryce, CEO of IPSE said: “A consultant working on his own will no longer be able to take a contract with a client at the other end of the country, but KPMG will. I believe that unless these rules are implemented very carefully they will have a detrimental impact on the whole UK economy.”
We will have to wait until the consultation has been concluded, but it is crucial for HMRC to recognise that there are significant differences between professional contractors and agency staff, and the way they operate.
However, Lucy Smith pointed out:
“In examples provided as part of the consultation, HMRC seem to have provided a key differentiation between the project-based contractor and the agency worker.”
Debt transfer concerns
Another concern involves debt transfer. Both clients themselves and intermediaries (such as umbrella companies) can become liable for future HMRC PAYE debts owed as a result of tax relief abuse in the future.
Clients will not want to be exposed in this way, so what can be done to reassure them?
Significant tax hit for affected contractors
And finally, contractors themselves are bound to be concerned, particularly those who undertake a lot of travel as part of their contract work. Some of our partners have told us that total annual expense claims for subsistence and travel of between £10,000 and £20,000 are not unusual.
What happens next?
Following the consultation period, the Government will publish a ‘response document’ later in 2015, and any legislative changes resulting from it will be announced during the 2015 Autumn Statement and included in the 2016 Finance Bill.
You can access the consultation page here.