The Chancellor earlier today confirmed his intention to restrict the ability of contractors to get tax relief on travel and subsistence expenses. Although the detail of the changes has not yet been released (and we expect the fine detail in the next couple of weeks) we have a good idea of what the legislation might look like based on a recent consultation document issued. In the written release of the Autumn Statement he says:
"3.20 Employment intermediaries and tax relief for travel and subsistence - As confirmed at Summer Budget 2015, the Government will legislate to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company or a personal service company. Following consultation, relief will be restricted for individuals working through personal service companies where the intermediaries' legislation applies. This change will take effect from 6 April 2016."
This could result in a reduction in take home pay for agency workers, umbrella workers and those working through PSCs (if caught by IR35). For those PSCs working outside IR35 and paying themselves dividends, there should be no change.
In 1998, following a lengthy consultation, the then Government introduced new legislation to allow site based workers tax relief for travel and subsistence expenses incurred travelling to site. At the time this was thought to be fair and reasonable (by 95% of respondents to the consultation) and the Government accepted that there were "people who have no permanent workplace but who, in the course of their employment, work at successive sites for short periods of time" who deserved to be treated in the same way as those with a permanent workplace i.e. they should be able to the claim the cost of travel to a temporary site.
In 2014, the new Conservative Government appeared to take a different tack focusing on the tax loss created by the rules and those "exploiting" the rules rather than accepting that the rules support the flexible workforce in getting to site.
HMRC issued a discussion paper addressing "the issue of employment intermediary structures and the use of overarching contracts of employment" but failed to publish the results. All the responses we have seen said that any changes would be a bad idea and would damage the temporary labour market. Rather than publish the responses HMRC elected to issue a second "consultation" document proposing to"remove home to work travel and subsistence tax relief where a worker is
- employed through an intermediary; and
- under the supervision, direction or control [SDC] of any person".
Once again the results of the consultation were not published despite Freedom of Information Act requests asking, amongst other things, for clarification on how the alleged tax loss was calculated. Our take on this is that HMRC has had problems justifying the numbers (which have changed over time) and that the Chancellor is committed to raising more tax (whether it is justified or not) to balance the books. At this stage the long term economic impacts are being ignored.
What does this mean?
This means that, unless the Government has a change of heart between now and April 16 (and this will only happen if there is an outcry from big business, recruitment agencies and contractors), the ability for contractors to claim travel and subsistence will depend upon clients, agencies and contractors being satisfied that there is no right to supervise, direct and control the contractor. It is important that all parties are satisfied of this since:
- It will only take one party to say there is, for example, a right of supervision for HMRC to demand additional tax.
- It is not only the contractor that will be liable for the tax (potentially the client too).
- Under the new rules HMRC only has to ask for the tax - it is for the contractor to prove that there is no SDC rather than the other way round.
The practical effect is that contractors take home pay is likely to go down (on average by £25/wk) unless the client is willing to either uplift the rate, to mitigate the loss or take a chance on receiving a tax bill from HMRC. Bearing in mind that the Public Sector is the biggest user of contractors it will be interesting to see if these increases materialise. What is clear from HMRC’s figures is that the increase has not been factored in.
In addition contractors may be less willing to travel long distances to site if they can't get any tax relief on their travel expenses. The wider effect on the building and staffing of schools, hospitals and power stations is yet to be seen.
It should also be noted that the Government sneaked (without consultation) a clause into the March 2015 the Finance Act (Section 289A (5) (b) ITEPA) which means that where income varies from week to week, due to expenses being reimbursed, you cannot claim tax relief on those expenses. This was clearly aimed at umbrella companies and agencies operating T&S schemes. The Government had said that it would review this clause in light of the consultations mentioned above. The effect would be that even if you could prove you were not supervised, directed or controlled you may still not be able to offset your expenses if working through an umbrella company.
On 10th November 2015 in the House of Lords, Lord Palmer of Childs Hill (Liberal Democrat) suggested Government repeal Section 289A (5) (b) of ITEPA or, alternatively, add a new clause to delay its implementation for 12 months to enable a full consultation and impact assessment to take place.
Lord Palmer stated that "Umbrella companies play a critical element in supporting the UK's flexible workforce" and that Clause 5 (b) under Section 289A could affect about 400,000 contractors by delaying receipt of legitimately incurred tax relief, whilst creating additional administration for both HMRC and contractors.
In the Autumn Statement the Chancellor said that the Government remains concerned about the growth of salary sacrifice arrangements and is considering what action, if any, is necessary. The Government will gather further evidence, including from employers, on salary sacrifice arrangements to inform its approach. This does not necessarily mean that the Government will reverse the amendment referred to above but is possible (though unlikely).
Intermediaries legislation - IR35
There was no reference in the statement to changes to IR35. This is probably because the Government is considering over 160 responses to a discussion document published on 17 July.
What happens next?
As with all such announcements the devil will be in the detail. We await the draft legislation due to be published in December. Even then there will be no certainty until the legislation is adopted. We have previously seen with tax legislation that it is tweaked right up to the last minute - look at the announcement in the Autumn Statement on tax credits.
There is still the opportunity for contractors, agencies and other businesses to make their feelings known to their local MPs.
We will keep our contractors updated as we learn more.
Should umbrella contractors consider switching to a PSC?
Even without getting tax relief on travel and subsistence expenses, there are many benefits of working through PayStream's umbrella, not least:-
- Continuous employment - helps with mortgage or loan applications and only having your pension building up in one place.
- Statutory benefits - access to SMP and SSP.
- Online portal - makes it easy to join, process timesheets and view payslips.
- Mobile app - for contractors to access their holiday pots, view their latest payment details or check the status of payments.
- Exceptional customer service - Freephone helpline for any questions, text messages confirming when contractors have been paid, pro-active welcome calls to help contractors get started.
- Employee rewards scheme - access to personal accident insurance, exclusive discounts on over 2000 High Street products.
- Inclusive insurance - £10m employer's liability, £5m public liability and £5m professional indemnity insurance cover.
- Employee loyalty scheme - 3 lucky contractors each month are drawn at random to win prizes worth £100s.
- Independent Financial Advisor access - Get help securing that mortgage, loan or other financial product with our experienced partners Haven Global Strategies Ltd.
- Peace of mind - Fully compliant service with reputable provider.
Also there is IR35 to consider if you decide to pay yourself dividends. If caught you lose the tax advantages of working through a PSC. HMRC look at job descriptions (assistant, manager, teacher are red flags) and rate (<£16/hr - red flag) when deciding whether to investigate.
Also if you are not going to contract for a long period then a PSC is probably not for you since you would incur closing costs when shutting the company down.
If however you feel a PSC is the right option for you we have a free set up (including bank account) and a free IR35 service to help guide your decision.