Unintended error spotted early
HMRC have discovered a fault line in the Travel & Subsistence (T & S) legislation, effective from 6th April 2016.
Last week the Revenue moved quickly to make a statement saying that the legislation contains a technical error about when the Supervision, Direction or Control (SDC) test applies. This will be corrected at the earliest opportunity and once it has been done HMRC will update their guidance. Corresponding amendments will also be made to the relevant NIC legislation.
For practical purposes, HMRC does not consider that this correction will alter the ultimate result for the vast majority of workers currently engaged through employment intermediaries, including umbrella companies. Those who are working under SDC will, in most instances, be akin to those who are an employee, so say the Revenue.
HMRC’s current guidance on the rules can be found here.
PSCs & IR35
Those contractors running their own companies and who come within the remit of IR35 do not have to consider the SDC test. However, where a contract is caught by the Intermediaries Legislation then they must not claim tax relief for associated travel and subsistence expenses. The current guidance contains a number of examples as to how this rule works in practice.
Example 1 – IR35 applies
Jeannette works via her PSC, JB Ltd on a six month contract providing interior design services to a luxury hotel chain where she works under the direction of the Head of Procurement.
She’s provided with office space at their largest hotel and goes there every day. She always buys lunch in the hotel restaurant. When she travels to the hotel, she is reimbursed for her travel expenses and for the cost of her lunch as a subsistence expense. IR35 applies to the engagement.
The employment intermediaries travel expense provisions apply to Jeannette’s travel and subsistence expense payments because the basic conditions are met and JB Ltd is subject to IR35. She isn’t entitled to tax or NICs relief on her travel expenses. Whether or not Jeannette is subject to SDC doesn’t need to be considered.
Example 2 – IR35 would apply but for remuneration being taken as salary
Dean is an IT Consultant who works as a contractor via his own PSC, DG Ltd. He’s the only director and shareholder. He’s providing his personal services through DG Ltd to a trucking company, T Ltd. Dean works as part of a team under the supervision of T Ltd’s IT director.
Dean is required to travel to T Ltd’s main depot at least three times a week and when he does is reimbursed his travel expenses to and from home. He takes all the income of the engagement from DG Ltd as his salary. DG Ltd needs to consider IR35.
It would be subject to the IR35 legislation and would need to make a deemed employment payment if Dean did not take all its income from the engagement as his employment income. His travel expenses are subject to the employment intermediaries travel expense provisions. There’s no tax or NICs relief on his travel expenses for any of these journeys. Whether Dean is subject to SDC does not need to be considered.
Example 3 – IR35 considered but doesn’t apply
Asif works via his own PSC as a draughtsman. In the last year his personal services have been supplied to several multinational companies to work on large engineering projects. Asif takes some of his PSC’s earnings as salary and some as dividends.
Asif’s PSC needs to consider IR35 but the circumstances are such that it isn’t subject to IR35 legislation for any of its contracts. Even though the basic conditions are met, the employment intermediaries travel expense provisions don’t apply because Asif’s PSC is not subject to IR35. This is regardless of whether or not Asif takes some or all of the remuneration his PSC earns from the provision of his services as salary. Whether Asif is under SDC doesn’t need to be considered.
Those examples above are as clear as mud. None of them describe my situation, and therefore I’m none the wiser.
What HMRC are never going to give (of course) are clear cut examples where IR35 definitely does not apply… lest we contractors should have a model to follow.
I agree, can you make clearer examples please? I suspect many of your readers are IT contractors who fall outside of IR35 – how does this affect us?
These examples makes no sense. 🙁
I don’t understand if 95% of income is treated as salary, how would my business afford to pay for expenses such as accountant, admin support, computer/phones, insurances, as well as travel and subsistence?
Er…is it just me or does the article not say what the flaw in the legislation actually is? Call me old-fashioned, but I expected to find that in this article.
well they wont tell you having realized they dropped a Bullock they are trying to fix it on the QT
(sounds like someone grassed them )
Do not get those examples at all. Can you speak in English pleased as opposed to in HRMC speak. This is half the problem with legislation…no one speaks blooming directly.
Glad I read the comments after the article as it didn’t make any sense to me either.
What I don’t get about the whole thing is that an employee of a bigger company, who is definitely subject to SDC, would be able to claim expenses to travel to a different site as part of his work. So why can’t an employee/director of a micro Ltd? None of the examples make any real world sense, you couldn’t run a business if you took all the turnover as salary.
[quote name=”Kathy Stella”]I don’t understand if 95% of income is treated as salary, how would my business afford to pay for expenses such as accountant, admin support, computer/phones, insurances, as well as travel and subsistence?[/quote]
Yeo, its just the way the HMRC and goverment iligally take more of your money, its that simple. When I was staff I was paid all my expenses, travel, meals, even going out drinking on Christmas do’s, equipment, the list goes on. Now I run my own PSC, I am subject to this illigal IR35, I try to get more contracts in but in this current market its almost impossible, I travel to places “touting” for business setting up meetings etc, but more often that not I have to go through agencies because they have driven a wedge between the company and the service supplier, saying that I am now left with one contract at the moment and it’s on going, they like me and give me continued work on differing projects. I am not staff, I have no desire to be staff, yet HMRC can come in and tell me I am!? If I can manage to get another contract I can suddelny become free of IR35 as I am spliting my time and services, so based on this, I will be punished on 1) how well the markets are (engineering isn’t doing to well at the moment, oil and gas has raveged it, not to mention millions of, immigrants with plastic credentials flooding in suppressing rates!) 2) my ability to aquire contracts!? Hmmm seems fair!
Is this new legislation being sponsored by the larger consultancies? It seems that they can still claim the costs of sending staff around the country to tout for / do business… But I have to work out if I personally can afford it, regardless of how much it might benefit my business. It seems that they want to restrict my business to near my home address or to try to move my family into the centre of London… rather than allowing me to buy a season ticket to compete with the big consultancies who send their staff in as a company expense. Anti competitive and unfair on entrepreneurs.
The T & S legislation is pretty straightforward for PSC’s. They do not need to consider the SDC test but rather whether or not each contract is caught by IR35. If it is then tax relief to the associated T & S expenses cannot be claimed. That’s it in a nutshell!
To say you have to consider IR35 but not S, D, or C is rubbish. By considering whether or not you are inside IR35 you have to consider whether or not you are under S,D or C. The whole thing is contradictory.