The Government's draft legislation and preliminary guidance on travel & subsistence (T&S) was published on 9 December which confirms, as expected, that "Individuals working through employment intermediaries will not be allowed to claim tax relief on their T&S expenses, where the worker is under supervision, direction or control (SDC) in the manner in which they carry out the work." In fact the legislation goes further than that and prohibits T&S expenses being claimed where there is a right of SDC. As pointed out by virtually all parties that responded to the consultation on this legislation this test could be used by HMRC to catch all workers even if in practice there is no SDC since a client will always have the right to say "build a wall there" or "create a website for my business" - this is direction.
This is something that HMRC will need to clarify or change over the coming weeks. Further guidance has been promised but the fear of many advisors is that HMRC will leave matters deliberately vague in order to give themselves room to manoeuvre in the future. This would leave taxpayers and businesses in a completely uncertain position. Some will take a "no risk" position and say "no T&S". Others will do their best to mitigate any risk but will no doubt have some interesting conversations with their auditors at year end about whether to make a provision in their accounts.
Interested parties have until the end of December to comment on the legislation which shows how interested the Government is in the opinion of those affected by the legislation. Indeed the Government, in its press release, said that "the measure is not expected to have any significant economic impact" which begs several questions:
- Are nurses travelling to cover shifts at hospitals expected to cover the travel costs out of their wages or will the NHS increase rates to cover this?
- Are contractors travelling large distances to help build power stations going to travel when they can't claim back their travel and subsistence costs? Are these projects to be put on hold?
- What about HS2? Contractors will be expected to travel away from home but will not be able to take advantage of any allowances negotiated with HMRC in respect of such travel if they work through an agency.
- Are supply teachers in Scotland going to travel to remote areas when the cost of travel will use up a large part of their wages?
- Will construction workers who have been driven to PAYE solutions like umbrella companies to comply with tax legislation now demand a return to CIS/self-employment in order to reclaim T&S?
Perhaps the Government, as the biggest user of temporary labour intends to compensate those working in the public sector for their loss, but what is more likely is that it expects individual workers to bear the cost. The Government states that "the precise impact on any individual is difficult to predict". What is very clear however is that those individuals travelling the furthest distances will be worst hit. Though the Government does not believe that the measures will have an impact on the flexibility of the labour market a recent survey by PayStream of its workers showed that (75%) of workers would reconsider travelling to site if they could not reclaim their travel expenses.
It should be noted that although there is currently a general consultation ongoing on Travel and Subsistence rules it is likely that MPs and other permanent workers will retain the ability to offset travel costs to temporary sites. Is this fair? HMRC has confirmed at round table meetings that workers working through intermediaries will not be able take advantage of NAECI and other collective agreements even though these agreements have been negotiated with HMRC. It will be interesting to see the unions' reaction to this.
The Government believes it will raise £155m in tax in 2016/2017 by introducing these measures. It does not seem to have factored in the cost to the NHS or school budgets or the cost to the wider business community. Even the most conservative estimates suggest a cost in the billions.
Although it is 90% certain that the legislation will be introduced in April there is still the opportunity for agencies and contractors to make their thoughts known and to influence the content of the final legislation and the guidance notes. The Government has kept as low a profile as possible in bringing the effect of the proposed legislation to the attention of working people and compliant businesses choosing instead to focus on non-compliant businesses (which HMRC should have dealt with) and "tax avoidance" in order to justify an unfair tax on contractors.
There are actually 2 pieces of legislation to consider:
- The first was introduced in last Finance Act and is aimed at salary sacrifice schemes. It comes into force in April. As drafted this catches T&S schemes as operated by agencies and umbrellas because remuneration varies with the amount of expenses claimed. It means that agency and umbrella contracts will have to be redrafted if tax relief is to be given on a week to week basis (which is what contractors want) or expenses will need to be reclaimed on a tax return or P87 at the year end. Even then expenses will have to fixed rather than variable.
- The second and most talked about change is an amendment to ITEPA 2003 which introduces a new S339A which prevents tax relief on travel and subsistence unless "it is shown that the manner in which the worker provides the services is not subject to (or the right of) supervision, direction or control by any person". The reality is that if T&S is to continue it will need the client, agency, umbrella and worker to confirm that there is no SDC. This will require the supply chain to work more closely together than ever before and there will no doubt be a narrowing of PSLs to work with umbrella companies that the agencies and clients can trust. This will not of course work for every worker and it is likely that we will see workers categorised into "potentially suitable" and "not suitable" for T&S categories.
Risk and debt transfer
The legislation makes the employment intermediary operating the T&S scheme primarily liable if there is SDC or the right thereof. Umbrella companies in particular will need to do sufficient due diligence to satisfy themselves that there is no SDC. There will no doubt be some companies that suggest a solution where all workers can claim T&S - this may be insurance backed (read the small print) or backed by an indemnity (worthless when you do the maths). We should not forget that it is these sort of companies that have brought the spotlight on the industry.
It should be noted that liability may fall on the agency and/or the client where "fraudulent documents" have been provided saying there is no SDC. Although fraud will be very difficult for HMRC to prove it is not difficult to see them taking the point when all of an agency's workers are stated to be outside SDC.
We can only hope that HMRC provides substantive guidance as to what constitutes SDC and that the reference to the right of SDC (which is ridiculous) is removed.
S339A(3) purports to exclude PSCs from the SDC test, choosing to rely on IR35 as the test as to whether T&S expenses should be allowed. In other words if the assignment is within IR35 then T&S is not allowed for tax purposes; if outside then T&S expenses will be allowed. HMRC guidance notes make it clear that this is the intention although there is a divergence of opinion as to whether the draft legislation actually achieves this. If not we would expect Government to amend the legislation before it is introduced.
No doubt if the Government sees a wholesale switch to PSCs the position will change before April. A recent press release by Professional Passport also warned that "MSC Legislation holds many traps for anyone considering a wholesale move of workers across to PSC".
We have spoken to many of our agency partners who all understand that, in the new world, we will need to work closer together. We fully expect PSLs to be reviewed and for agencies to work only with those providers they can trust to operate within the new rules, particularly bearing in mind the debt transfer risks. PSC PSLs will become more common as the supply chain becomes more interested in how PSCs operate.
We expect that the legislation and guidance notes will not remain the same. At present it is does not allow for business to operate with clarity - see for example the "right of SDC" point made above. The current position seems to be that HMRC will issue further guidance that will make everything clearer. We will see. We do not expect Government to accept that it has got the legislation wrong but there will no doubt be a backlash once workers and business realise the cost to them of these changes. Local MPs should expect a flurry of letters. In terms of the impact on the economy we would hope that BIS, the CBI and other influential organisations will intervene.
Umbrella companies will continue as they provide a valuable service to contractors (ease of payment, support, continuous employment, statutory benefits) and to agencies (payment processing, insurance, HR support) and in certain circumstances T&S will continue to be available if all parties in the contractual chain agree.
PSCs will continue in their current form although there will be an increased focus on IR35 reviews. Companies, like PayStream, that have an in-house IR35 team will have an advantage over those that do not. Those operating "inside IR35" PSC solutions will need to review their expenses policies since they are clearly caught by the new legislation.
CIS numbers will probably increase as agencies carrying out SDC tests (for T&S) will realise that similar tests apply in relation to self-employment.
Finally the Government will lose a fortune but never admit it.