Save content
Have you found this content useful? Use the button above to save it to your profile.
iStock_intraprese_CD

Travel and subsistence: HMRC changes course

by
10th Dec 2015
Save content
Have you found this content useful? Use the button above to save it to your profile.

Following the summer consultation on ‘Employment Intermediaries and Tax Relief for Travel and Subsistence’, many were expecting HMRC’s proposals to be automatically implemented when the Finance Act 2015 was published - despite objections. Jennifer Adams submitted a response to the consultation document on behalf of AccountingWEB members, and now looks to see whether the objections raised by members have been acknowledged.

The policy document ‘Income Tax: employment intermediaries and relief for travel and subsistence’ does not give much in the way of detail, just describing the issues and the new measures in general terms. The background and details are to be found in the ‘Summary of Responses: Employment Intermediaries and Tax Relief for Travel and Subsistence’.

It is a lament of many AccountingWEB members that HMRC do not listen to suggestions, but these documents could be seen as proof that if enough individuals, groups or organisations make their views known then HMRC will at least consider amending their proposals, even though the actual substance remains.

HMRC received 163 responses to this consultation from contractors, the recruitment sector, charities, trade unions and businesses. In addition, a total of 17 ‘stakeholder events’ were attended by over 300 individuals. Inter alia there were responses from such big players as the CBI, G4S, ICEAW, UNITE, 22 ‘umbrella companies’ and 18 employment agencies including Hays.

Who will now be affected?

The consultation document centred on the claim for tax deduction of travel expenses incurred from home to place of work and of subsistence expenses incurred by individuals working via ‘employment intermediaries’: such entities being defined as ‘an entity, including a company, a partnership, or an individual, which interposes itself’ (i.e. sits between) ‘a worker and the ‘engager’, as part of an arrangement for the worker to provide their personal services to that ‘engager’’.

HMRC was particularly looking at ‘umbrella’ service companies, employment businesses (i.e. agencies who supply workers for services) but personal service companies (PSC) were also dragged into the net.

It was the inclusion of all PSCs that most concerned our members, and after representations the rules will not apply to PSCs who have not already been caught under IR35. HMRC does not actually say that they have backed down, but under the guise of appearing to be concerned with there being one rule to consider in deciding whether an entity is IR35 and another in deciding whether the travel rules are relevant, the text states: “The government agrees that it would be overly complicated and burdensome for a PSC to have to consider two tests for each engagement it undertakes. The proposals have therefore been amended, so that the new measures will only apply to a PSC’s contract when it falls within the ‘intermediaries’ legislation.”

‘Supervision, direction or control’ tests resurrected

HMRC withdrew these three tests for IR35 as of 6 April 2015, but they have been resurrected for use specifically in deciding eligibility for travel and subsistence expenses. It is stressed that the use of such tests ‘will not impact on a worker’s employment status, or wider employment rights’. In other words, they will be taking a wider view of whether an entity is IR35 rather than relying on the tests to reach their decision.

HMRC believes that so long as they give what they term ‘clear guidance’ there should be no confusion when having to decide whether the new travel rules apply or not. They intend to review their existing guidance and issue additional guidance before the measures are enforced.

In the original consultation document there was a great deal of line space taken up with the question of how to decide whether a ‘place of work’ was ‘permanent’ or not. If it was permanent then the new travel tax deduction restrictions would apply, but there is no mention in the final document.

Liability for getting it wrong

HMRC wants to place responsibility for policing these new rules squarely on the shoulders of someone other than themselves, and with this in mind came up with two options.

Option 1:

It would be the responsibility of the end user (the ‘engager’) business to confirm with the ‘employment intermediary’ as to whether the contracted worker is working under ‘supervision, direction or control’. If so agreed then the restrictions would apply. Should HMRC subsequently find that tax relief has been claimed incorrectly, the engager would be made ‘jointly and severally liable’ for any tax unpaid by the ‘intermediary’ business.

Option 2

Again it was intended that the ‘engager’ would be responsible for confirming with the ‘employment intermediary’ that the contracted worker was working under the ‘right of supervision, direction or control’. If so agreed, then under option 2 the ‘employment intermediary’ would remain responsible for any tax debt incurred, only transferring the liability to the ‘engager’ should the ‘intermediary’ have been misled about the nature of the work.

Option 1 caused most concern amongst respondents, including AccountingWEB members. It was felt that the risk to the ‘engager’ of having to pay HMRC if the rules were found to have been applied incorrectly by the ‘intermediary’ could mean that an ‘engager’ would be reluctant to agree that any worker was not under ‘supervision, direction or control’. Option 2 was also derided as it was felt that it would be difficult to enforce.

Alternative option – suggested, accepted and implemented

In the consultation an alternative option was suggested. The decision of ‘supervision, direction or control’ remains but now any tax debt arising from the deliberate misapplication of the rules is to be transferred ‘jointly and severally’ from the ‘intermediary company’ to its director(s), so that the ‘engager’ is not involved. It is intended that these rules be implemented where it can be shown that the ‘intermediary’ had knowing failed to apply the rules correctly.

In addition, a second transfer of liability is to be introduced, moving the tax debt to another relevant party where it can be proved that that party provided a fraudulent document which lead the  ‘intermediary’ to being misled into making a claim but should not have done so. The reasoning behind this approach is to discourage directors of ‘intermediaries’ companies from making an incorrect claim, finding that they have a tax liability and then liquidating the company, thus avoiding the tax arising from a deliberate failure to apply the rules. The tax liability can now be claimed from the ‘engager’ or other party involved in the contract.

The Result?

  1. Interestingly the table under ‘Summary of impacts’ shows the same figures for tax receipts in the consultation paper as in the final policy document. Probably an error, but if correct this proves that the non-IR35 PSCs would have produced little, if any, income for the Treasury under the original proposals – the main income probably coming from ‘umbrella’ companies and agencies.
  2. As these rules are only relevant to PSCs caught under IR35, will this mean that HMRC will be hardening their efforts to bring more PSCs within the IR35 rules? We already know that HMRC have increased the number of staff looking into IR35 situations.
  3. It is pleasing to see that HMRC’s suggested options have been replaced. It was worrying that HMRC had originally intended to place the onus of compliance on the end user (‘engager’) rather than solely on the ‘intermediary employer’ who, after all, is usually the entity that pays the tax bill.
  4. The question as to how the ‘intermediary’ will prove that they had been ‘mislead’ by the ‘engager’ has been answered, in that there needs to be a ‘fraudulent document’ produced by the other party. As it is more likely that these new rules will affect workers working under ‘umbrella’ companies and employment agencies, rather than any other PSC, then this section will probably be irrelevant as template contracts will be used.

Replies (18)

Please login or register to join the discussion.

By JCresswellTax
11th Dec 2015 08:59

Thanks Jennifer

This is a very helpful interpretation of the finance bill documents.

Having read over them myself, they were not the clearest to understand (for me anyway)!

Thanks (0)
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
14th Dec 2015 11:27

On the cards since Autumn Statement

I think the government's direction of travel here became much clearer when David Gauke confirmed at the Autumn Statement that the government was going ahead with a review aimed at resolving the somewhat complex tests currently applied by the courts to resolve employment status.

Having HMRC invent its own, stripped-down online supervision, direction and control (SDC) test never made sense. But if a new definition is agreed and enacted in law, that would do away with a huge amount of legal faff around all of these issues. 

Some AccountingWEB members are a little sceptical, however, about how long it will take the government to achieve this resolution.

Thanks (0)
avatar
By k2p2
14th Dec 2015 12:38

SDC
‘Supervision, direction or control’ tests resurrected
 HMRC withdrew these three tests for IR35 as of 6 April 2015...'   What did I miss?  What was withdrawn?    
 
It's also important to point out that, for those working through umbrellas, SDC will be assumed - the onus will be on the client to provide evidence to the contrary.  This is a worrying portent of where IR35 may be heading.

Thanks (0)
avatar
By Ian Lawrence
14th Dec 2015 12:23

Just to be clear.  If a

Just to be clear.  If a client of mine is a PSC it does NOT have to stop claiming travel and subsistence from 6th April 16 as previously thought?

 

Thanks

 

Thanks (0)
Replying to New To Accountancy:
avatar
By k2p2
14th Dec 2015 12:37

Subject to the 24 month rule,

Ian Lawrence wrote:

Just to be clear.  If a client of mine is a PSC it does NOT have to stop claiming travel and subsistence from 6th April 16 as previously thought?

 

 

Subject to the 24 month rule, if they are operating outside of IR35, then no.  If they are caught by IR35, then yes.  However, if they are investigated and found to be within IR35, then they are likely to owe the tax on expenses in addition to employment taxes.

Thanks (0)
Replying to unclejoe:
avatar
By woody24
14th Dec 2015 17:04

Subject to the 24 month rule

I think that your client may have to stop claiming travel and subsistence from 6th April 2016

The Finance Bill 2016 (section 9 page 61) brings in a new section 339A ITEPA 2003 which has the following effect in relation to employment intermediaries:

1) Each engagement is regarded as a separate employment and so the 24 month rule doesn't apply ie in effect, your client has to stop claiming travel and subsistence from 6th April 2016 because he/she is travelling to a permanent workplace.

2) However, subsection (2) says that section 339A does NOT apply if the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction  or control by any person. So, from 6th April 2016, if you can show that there is no supervision or direction or control (or right of) then your client can claim travel and subsistence, subject to the temporary workplace rules.

3) If your client is within IR35 then then the 'get out' in 2 above is not available and the engagement is always a separate employment. So even if you could demonstrate that there was no supervision, direction of control, if IR 35 applies, then your client can't claim travel or subsistence expenses.

 

 

 

Thanks (0)
avatar
By tommaher
14th Dec 2015 13:06

Clarification point
If my Projectmsnagement company wins some business to provide project management consultancy and I chose not to do the work. Can I hire another contractor through their limited company to do the work if I have rights of substitution in the main contract or do I fall into the trap described in the article. Periods are usually 3 - 18 months on project based contracts

I ask because companies often use intermediaries and they mainly want to engage us like an agent as opposed to a consultancy. Is it better to have the contract direct with the end client as opposed to intermediaries like manpower, hays, reed etc

Thanks (0)
avatar
By AndrewV12
14th Dec 2015 14:47

mmmm

In addition, a second transfer of liability is to be introduced, moving the tax debt to another relevant party where it can be proved that that party provided a fraudulent document which lead the  ‘intermediary’ to being misled into making a claim but should not have done so. 

 

Whats that chinese for.

Thanks (0)
avatar
By AndrewV12
14th Dec 2015 14:52

How it will pan out

I have worked in Accountancy for over 15 years and I believe that the proposed changes if implemented will pan out as follows:

 

7 out of 10 accountants will understand and correctly implement the changes

1 out of 10 will be unaware of the changes

2 out of 10 will interpret the changes any way they want

Thanks (0)
avatar
By k2p2
14th Dec 2015 23:00

Outside IR35, nothing changes

If your client is operating through a limited company (PSC) and outside IR35, the new legislation does not apply

 

https://www.gov.uk/government/publications/finance-bill-2016-draft-legis...

 

1.13

"relief will be restricted for individuals working through personal service companies where the intermediaries’ legislation (IR35) applies, and for individuals working through other employment intermediaries, where the worker is under supervision, direction or control in the manner they carry out the work."

 

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

 

1.8 The government will therefore amend its proposals, so that the new measure will only apply to a PSC’s contract when it falls within the intermediaries legislation,

Thanks (0)
Replying to paulhammett:
avatar
By woody24
15th Dec 2015 09:10

Outside IR35, nothing changes?

Thanks k2p2 - I am happy if I am wrong here, but the second part of 1.13 (your quote above) says relief will be restricted:

"for individuals working through other employment intermediaries, where the worker is under supervision, direction or control in the manner they carry out the work"

 

Thanks (0)
avatar
By k2p2
15th Dec 2015 10:33

No definition of PSC

As the quote says, the SDC rule only applies to employment intermediaries other than PSCs - PSC contractors operating outside of IR35 can still claim.   However, there is no definition of a PSC - but we can assume it means a limited company contractor/freelancer.

Thanks (0)
avatar
By woody24
16th Dec 2015 12:45

No definition of PSC

For the purpose of the new section 339A, "Employment Intermediary" includes PSC's. see EIM80200

 

 

Thanks (0)
Replying to frankfx:
avatar
By k2p2
16th Dec 2015 13:23

PSCs

woody24 wrote:

For the purpose of the new section 339A, "Employment Intermediary" includes PSC's. see EIM80200

Looking at the two quotes, I can see that there is ambiguity in the first depending on where you put the emphasis 

1.13

"relief will be restricted for individuals working through personal service companies where the intermediaries’ legislation (IR35) applies, and for individuals working through other employment intermediaries, where the worker is under supervision, direction or control in the manner they carry out the work."

But the second quote appears to confirm that PSCs will only be affected when subject to IR35.

 

1.8 The government will therefore amend its proposals, so that the new measure will only apply to a PSC’s contract when it falls within the intermediaries legislation,

 

Thanks (0)
avatar
By woody24
17th Dec 2015 10:13

PSC's

I think that some commentators assume that "Employment Intermediary" has the same meaning as that used in the PAYE regs. There has to be more than one individual providing services to the end client for these to apply. So PSC's are generally not included unless they provide 'substitute' labour for the director / owner. Umbrella companies etc are caught.

However, for the new section 339A "Employment Intermediary" is defined as:

"A person, other than the worker, or the client, who carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour."(Sect 339A subsection 9 )

I think that catches PSCs (not just those within IR35) and the hmrc guidance in EIM80200 seems to back that up.

I would delighted if someone proves me wrong on this. 

Thanks (0)
avatar
By Ian Lawrence
17th Dec 2015 12:26

A PSC


Does everyone (or anyone!) use the same definition of a PSC as I do : "A company in which more than 50% of the sales revenue is derived from the services of one individual"?

Thanks (0)
avatar
By imbs
01st Sep 2016 15:23

I'm catching up on all of this - better late than never.
Just to be clear. If a client of mine is a PSC it does NOT have to stop claiming travel and subsistence from 6th April 16 as previously thought? I've read through the answers and am still confused. Any up to date thoughts/concrete answers? I'll continue to trawl through everything on here but would appreciate up to date thoughts if possible.
Thanks

Thanks (0)
Replying to imbs:
avatar
By k2p2
02nd Sep 2016 15:37

imbs wrote:

I'm catching up on all of this - better late than never.
Just to be clear. If a client of mine is a PSC it does NOT have to stop claiming travel and subsistence from 6th April 16 as previously thought? I've read through the answers and am still confused. Any up to date thoughts/concrete answers? I'll continue to trawl through everything on here but would appreciate up to date thoughts if possible.
Thanks

Subject to the 24 month rule, if they are operating outside of IR35, they can still claim travel and subsistence. For Ltd Company contractors, the test is IR35, not SDC.

Thanks (0)