Changes to Travel & Subsistence Taxation

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Changes to Travel & Subsistence Taxation

 5th Apr 2016

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As most of you are aware, from the 6th April 2016 changes to the way tax is applied to travel and subsistence expenses for contractors take effect. But what does this mean for clients and contractors?

Primarily the impact is on contractors and the intermediary – namely umbrella corporations – but their relationship with the end user (the client) is critically important to determine the tax position. Below is a summary courtesy of APSCo on how these changes will impact on the contractor and the end user/client.

Contractors employed by and supplied by intermediaries, primarily umbrella companies in practical terms, will no longer be allowed to claim tax relief and National Insurance Contributions disregard on travel and subsistence costs associated with “ordinary commuting”. For each assignment the umbrella company will need to decide whether tax relief is allowable.

To do so they will need to determine whether the contractor is under the supervision, direction or control (SDC) of any person in the manner in which they undertake their work or someone has the right to exercise SDC.

We may have to contact clients to request information on placements to enable the umbrella companies to reach a decision. This will require the client to review the manner in which they work with contractors.

Specifics

These changes affect contractors who meet the criteria below:

  • Contractor personally provides services to another person.
  • Contractor is supplied under arrangements involving an employment intermediary.
  • The manner in which the Contractor provides the services is subject to the supervision, direction or control (SDC) by any person or someone has the right to exercise SDC.

If the criteria apply, then such contractors will no longer be able to claim tax relief and NIC disregard on the travel and subsistence expenses they incur on their commute from home to work and this may lead to an effective reduction in their take home pay.

For those contractors working via their own Personal Services Company (PSC), they will no longer be able to claim tax relief or a NIC disregard for those assignments which they consider to be within IR35. As the law stands, IR35 is a matter for the PSC to take a decision on.

It is not a decision for us (the recruitment firm) or the client and the SDC test should not be used. HMRC state that contractors falling within the travel and subsistence criteria are assumed to be under supervision, direction or control, unless it is shown otherwise. The legislation is not specific as to how it should be “shown otherwise” or by whom.

HMRC in their policy document dated 9th December 2015 state that most end engagers will only need to take action where a worker is not under supervision, direction or control in the manner they undertake their work.

Liability

Primary liability sits with the intermediary employing the contractor. Under the legislation an end client can only be held liable if it provides, or is complicit in the provision of a fraudulent document to demonstrate the worker was not subject to (or a right of) supervision, direction or control as to the manner in which they provide their services.

In this case the party providing the document could be liable for the tax debt and if both the end client and the recruitment firm are involved then they could be jointly and severally liable.

Client Guidance

It is sensible to consider how you work with contractors, how you engage the skills and experience of the specialists you employ. The Supervision, Direction or Control test is multi-faceted but HMRC have promised improved guidance in April 2016.

You will naturally have to scope out the project or service when a contractor starts an assignment. This will include agreeing the service objectives and the outcomes expected; what you need them to do, why the services are required; expected delivery dates and even a discussion as to where they will work and expected working hours.

However, you then need to consider how you will monitor and oversee the delivery- will the contractor be left largely to determine delivery or will s/he receive regular instruction and work within a team. This latter consideration focuses on “the manner” in which the services will be delivered, which is relevant to an assessment of supervision, direction or control.

Reviewing terms in place with your recruitment firms will assist you to understand each parties’ contractual obligations and the manner in which the services should be delivered by a contractor and monitored by you. You should anticipate that recruitment firms will request information from you on the manner in which a contractor will deliver his/her services on assignment and this will be need to be obtained during the on-boarding process.

Contractor Guidance

HMRC state that contractors falling within the travel and subsistence criteria are assumed to be under supervision, direction or control, unless it is shown otherwise. The legislation is not specific as to how it should be “shown otherwise” or by whom.

HMRC in their policy document dated 9th December 2015 state that most end engagers will only need to take action where a worker is not under supervision, direction or control in the manner they undertake their work. Determining SDC requires complex analysis.

There is lengthy HMRC guidance and examples issued in April 2014 in response to the intermediaries and further guidance has been promised for April 2016. HMRC guidance states ‘the exercise or right of supervision, direction or control must be over the manner in which the services are rendered’.

 In the final wording of the legislation it states that when considering evidence to determine status ‘the mere assertion by a person that the manner in which the worker provided the services was not subject to (or to the right of) supervision, direction or control by any person is not such evidence’.

We understand that most umbrella companies are relying on questionnaires to be completed by the contractor to determine their SDC status. The reliability of this assessment is determined by the quality of the questions and the accuracy of the answers given.

These questionnaires should ascertain the nature of the contractors’ day to day activities, their interaction with others at the end client site and the degree of oversight exercised by the end client in order to deliver an accurate answer. It is not sufficient for the contracts in place between the umbrella company, the employment business and the client to simply state there is no supervision, direction or control.

A decision cannot be based on a contractor’s hourly or daily rate. This can be an indicator of skill and experience but does not determine supervision, direction or control on a placement.

Next Steps

For current placements and each future placement, if a contractor is employed by an umbrella company they should consider how they work on a placement. Contractors may be guided by their umbrella company but should bear in mind that Supervision, Direction or Control on assignment is assumed unless “shown otherwise”.

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