The long awaited Travel and Subsistence consultation has been released examining how the Government intend to tackle claims of travel and subsistence expenses by workers of employment intermediaries.
Effectively the consultation proposes to remove the availability of travel and subsistence expenses by deeming the end client site (the place where services are actually performed) a permanent workplace (converting the travel to ordinary commuting for the purposes of ss336-339 ITEPA).
The legislative proposal within the consultation is to remove tax relief for workers who fall within the following definition:
1. Who supply personal services to another person (the engager);
2. Where a third party whose business is mainly in the supply of labour (the intermediary), sits between the worker and engager and is part of the arrangement for the worker to provide services to the engager; and
3. Who provide services in a manner which is subject to (or the right of) supervision, direction or control of any person.
For those au fait with S44 ITEPA this definition will be familiar. An interesting point to note here is the emphasis of definition; unlike the new form of s44 ITEPA it appears that it is the intention that all three must be met before tax relief is disallowed. This is akin to the pre-2014 s44 definition (as opposed to the post 2014 legislation) – more on this later.
This essentially places an employee of an umbrella (who meets this definition) in the same position to if he were engaged by the agency directly (ie. each attendance on client site becomes a fixed term separate contract and travel and subsistence expenses are not claimable).
Employment intermediary, within the consultation is described as:
“an entity, including a company, partnership, or an individual which, interposes itself between a worker and engager, as part of an arrangement for the worker to provide their personal services to the engager”
The consultation states umbrellas and PSC will be within the definition but the professional services of firms seconding staff will not.
Personal service
The consultation states “The intention is that the worker must personally provide their services to another person (the engager) or be obliged to so.
How this is enacted in the final definition could be pivotal. Ie whether an individual is automatically caught within this by virtue of attendance on site, or whether if the company has a right to utilise substitute it would break this requirement. We will unlikely know the answer to this until we see the final version of the legislation.
Third party mainly in the supply of labour
This is standard agency regs definition, what will be interesting is how HMRC approach “mainly in the supply of labour”. If a company is contracting for the provision of services, insured for that provision of services and provides equipment to facilitate those services, at what point could/would that company fall into (or outside of) merely providing people in the eyes of HMRC (and ultimately the Tribunals).
Supervision, Direction or Control
Under s44 ITEPA ITPEA the onus is on the taxpayer to prove a lack of supervision, direction or control as to the manner in which the services are provided ie the arrangements are caught by s44 ITEPA by virtue of the existence of an intermediary.
Under these proposals however (as with the pre2014 version of S44 ITEPA) it would appear the onus is on HMRC to determine the existence of (or a right of) supervision, direction or control before tax relief is denied. While this may seem like splitting hairs, for anyone in an advisory capacity or arguing HMRC Enquiries this could be a fundamental to any HMRC challenges.
Transfer of Liability
The consultation document considers where and how the liability should fall. There are two overriding options.
Option 1 sees the liability placed jointly and severally on both the engager and the employment intermediary (ie the agency/client and the umbrella company) outright.
Option 2 sees liability prima facie with the employment intermediary (umbrella) unless they can provide evidence to demonstrate they relied on false information provided by the engager, in which case liability may be transferred up.
Both options offer up their own problems and discussions – most (if not all) umbrella company providers would argue that the umbrella industry is Agency driven. As such if Agency’s aren’t automatically in the frame for potential liability then there will be no reason for Agency’s to alter how they operate and place all the burden squarely on Umbrella companies. This could ultimately mean very little will change, other than the individuals suffering by a loss of take home pay.
PSCs
The consultation makes specific reference to PSCs, interestingly the consultation specifically says:
“In general, those who have contracts that fall within IR35 will no longer be eligible to apply tax relief to travel and subsistence payments…”
This is presumably because if a company is caught by IR35 there is already demonstrably sufficient control to bring the arrangements within the proposed definition.
The consultation does not suggest the converse however, and it is clear there is a perception that PSCs could operate outside of IR35 but be caught by this new definition. This is an unsettling position for limited company contractors who are already facing the complexities of IR35, office holders, S44 and the new rules on dividend taxation.
Impact
There is much discussion on varying business and some discussion on certain industries however the crux of the matter is this:
For any individual who is caught within the proposed definition, the client site he attends for the performance of services will be deemed a permanent workplace and he will be unable to claim travel and subsistence expenses for home to this workplace.
The consultation also confirms, however, the normal application of the expenses legislation for travel and subsistence payments over and above this. In other words, for individuals who incur travel and subsistence expenses in the performance of their duties to and from client site, even where they are subject to supervision, direction or control as to the manner in which they provide their services, these expenses can be reimbursed tax free.
Going forward it is clear that some umbrella companies, and agencies, will need to look to their workforce and contracts. Unfortunately for any companies who undertook a shift in engagement of their workers last April, from Self-employed to Umbrella may now find that the Umbrella is no longer a viable option. Unpicking this transfer may not be so easily achievable.
It is not all bad news. Umbrella companies are not all dead in the water and it is clear that for a number of individuals Umbrella companies will remain a viable option. As has always been our advice, Umbrella companies are not a one size fits all solution, and it is true to say that going forward the pool of individuals suitable for umbrellas is reduced.
Self-employment and limited company route remain viable options (where appropriate) for individuals. As well as, what has been dubbed, the “hybrid” where by individuals are engaged on a self-employed basis but are subject to tax and NI on all payments made to them.
What does not look viable, however, is the additional “hybrid” model where self-employed individuals are engaged but expenses payments under ss-336-339 are paid to them, as under these proposals all expenses paid under ss336-339 would be caught by this new definition (meaning, arguably, the reason why this hybrid model exists has now become redundant).
The consultation itself can be found here:
Exchequer Solutions comments, “We await to see what HMRC decide to do and will know later in the year, we sincerely hope they don’t penalise the compliant Umbrella Companies and hard working contractors in the UK who travel to and from various temporary workplaces each week and quite legitimately claim their expenses, whilst they try and deal with the rogue element of our industry. If they do this will both be unfair and will have a detrimental effect on UK PLC as a whole. If they do, we will as always, offer compliant services to contractors that need them – whether these services are more or less efficient remains to be seem. Whilst the change to the market place could be significant in the year ahead, there is little mileage In speculating at this point as we have to await the details of the consultation process – we will of course keep you informed in the months ahead as the changes and solutions become clearer. If you would like to discuss the changes please contact us and we’ll be happy to come and meet you.”
