Legislation changes suggest more to come

PSC travel to come under IR35’s scope

Last week the draft legislation for tax relief for travel and subsistence for employment intermediaries was published and contractors were able to breathe a sigh of relief…at least for the time being.

Following the July consultation document, ‘Employment Intermediaries and Tax Relief for Travel and Subsistence’, it looked likely that it was a done deal that supervision, direction or control (or the right thereof) (SDC) would be the sole determiner in whether a contractor could claim future travel expenses. The welcome surprise was that the Government appeared to have actually listened to those who warned against such a measure, but could there be a twist in the not too distant future?

PSCs will now only be prevented from claiming tax and NIC relief for travelling expenses incurred on business journeys where they are caught by IR35. Sounds good news given that a large percentage of contractors already operate outside of the intermediaries legislation. This however has to be tempered with the knowledge that IR35 reform is still under consideration. Could it be then that the IR35 rules will become more rigid in the future, especially against a backdrop of a government that is committed to addressing perceived imbalances in the tax system, “where some individuals and businesses benefit disproportionately from certain rules”.

Limited company contractors should be aware that the liabilities arising as a result of a failed IR35 enquiry will now potentially be boosted by reclassified travel and subsistence claims. For now though, it will be those individuals working through an umbrella company or a recruitment agency/employment business who will suffer from the punitive SDC test and will be prevented from claiming home to temporary workplace travel costs from 6th April 2016. The government estimate that around 430,000 individuals will be affected by these changes.

Umbrella companies in particular will now have to re-think their strategies, starting with their contracts, as it will prove very difficult for them to show that an employed worker is not subject to a degree of SDC. HMRC will assume that unless it is shown otherwise all workers are under SDC in the manner in which they provide their services.

The ‘Summary of Responses’ to the consultation document, to which there were 163 respondents, reveals that many of those respondents felt that the SDC test is too subjective and not sufficiently clear and that asking PSCs to apply two tests for every engagement they undertook would be burdensome. Whilst the government accepted the latter concern, and this is why they amended their original proposals, it still believes that, with appropriate guidance, the SDC test will become clear enough. To this end, therefore, HMRC will work with stakeholders to develop this guidance.

Transfer of liability

In a bid to discourage directors of ‘employment intermediaries’ from liquidating their companies to avoid debts arising from a deliberate failure to apply the rules, a debt transfer provision will also be introduced which will transfer, jointly and severally, any debt arising from the deliberate misapplication of the rules from the employment intermediary (the business employing the worker) to its director. Such a transfer of debt will only be applied where it can be demonstrated that the employment intermediary had knowingly failed to apply the rules correctly, when they had been told that travel and subsistence relief should not be available.

A second transfer of liability will move the debt to another relevant party where they have provided a fraudulent document that misled the employment intermediary so that relief to travel and subsistence was allowed. This could therefore be the engager or some other party in the contractual chain.

Guidance on the draft legislation can be found here.