As flagged at the time of the Summer Budget 2015, the government yesterday confirmed in the Autumn Statement that it 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 for travel and subsistence expenses will also be restricted for individuals working through personal service companies where the intermediaries legislation (commonly known as “IR35”) applies. This change will take effect from 6 April 2016.
We and other commentators suspect the government may also look at making changes to IR35 to take effect from 6 April 2016.
- Umbrella companies and other employment intermediaries will no longer be able to pay travel and subsistence expenses tax-free for travel from home to, what are currently treated as, temporary workplaces from 6th April 2016.
- The measures will extend to personal service companies where the intermediaries legislation applies.
The new measures will apply where individuals are:
- supplying personal services;
- engaged through an employment intermediary (including umbrella companies, certain employment businesses and personal service companies); and
- subject to (or to the right of) the supervision, direction or control (“SDC”) of any person (in the case of umbrella companies) or subject to the intermediaries legislation (in the case of PSC company contractors).
In addition to the expenses legislation, the government signalled a clear intent to target tax avoidance more generally by announcing a raft of measures aimed at “serial avoiders”, improving the effectiveness of the General Anti-Abuse Rules and disguised remuneration.
Tax compliance and enforcement activity are likely to be assisted by plans to digitise tax administration by 2020. This will require most businesses and self-employed people to keep track of their tax affairs digitally and update HMRC at least quarterly via a digital tax account.
We expect that the government’s response to the July 2015 consultation on expenses, the response to the July discussion paper relating to IR35, and draft legislation will be published on 9th December 2015.
A further consultation on the draft legislation, open until 3 February 2016, will aim to ensure that the legislation works as intended. As such, this further consultation will focus mainly on the technical wording of the new legislation rather than to re-open the policy debate relating to the proposed legislation.
We will send out another, more detailed, update following publication of the draft legislation next month.
Future for umbrella workers
It is very hard to argue that someone who is employed by an umbrella company is not subject to SDC or the right of SDC – that is the nature of employment. And the likelihood is that hirers and/or staffing companies will consider that they are potentially at risk if they use umbrella workers, and that they will now take far more interest in exactly what goes on in their supply chain. Accordingly, widespread use of “traditional” umbrella company payment models is likely to end, leaving many workers having to find new engagement arrangements.
Some will transfer to agency payrolls which will mean a reduction in take home pay due to the removal of tax free expense arrangements. Alternatively some engagers may agree to increase payment rates to their staffing companies, especially where the workers have relatively greater economic power (where there are skills shortages). In some cases margins may be reduced to help cover the loss of take-home pay (though staffing company margins will usually not be large enough to swallow all the tax increases).
Others may move into sole trader engagements. However, the intermediary will still need to check SDC/employment status to determine if expenses can be paid tax-free and also to determine if the rest of the worker’s pay can be paid gross. The intermediary also has a quarterly reporting burden in respect of payments made to sole traders.
Some umbrella companies are likely to use their efficient software and specialist payroll expertise to offer new services, and many will become payroll agents for staffing company clients and other intermediaries who are not geared up to run their own payroll. Others may look for more far-reaching changes to their models.
Intermediaries should note that moving umbrella contractors or other agency workers into self-employed models, PSCs or other arrangements, where a main purpose of the move is to reduce tax, runs a high risk of triggering liability (which can extend to director personal liability) under existing anti-avoidance rules (known as “TAAR”) and/or the MSC legislation.Umbrella companies will be further affected by the government’s plan to introduce the apprenticeship levy in April 2017. It will be set at a rate of 0.5% of an employer’s pay bill and will be paid through PAYE. Each employer will receive an allowance of £15,000 to offset against their levy payment. This means that the levy will be paid on any pay bill in excess of £3 million.
PSCs and possible changes to IR35
We await the draft legislation to see in what circumstances travel and subsistence expenses will be withdrawn for individuals engaged via PSCs, but from what has been announced, it appears that where the intermediaries legislation (IR35) applies, the expenses cannot be paid on a tax-free basis. However, there has been no clarity as to how this will be enforced and who will be liable for the unpaid tax.
IR35 currently relies on a hypothetical employment test: not an SDC test. So if the intention is to apply the expense legislation only to PSCs which fall within IR35 it is possible that the government plans to change IR35 (with effect from 6th April next year) to bring it in line with the SDC test. If there found to have been a surge in PSC contracting in 2015-6 the government may be very tempted to change IR35.
The Autumn Statement gives no clues as to whether or how “employment intermediary” will be defined, other than to confirm that umbrella companies and PSCs will be employment intermediaries.
At this stage it is not clear whether other types of business may be caught by the legislation. We await the draft legislation to comment further on this.
As it stands, we think that outsourcing companies who generally supply an outsourced service on a fixed price project basis rather than on a time-spent labour services basis may be outside scope. However there may be grey areas, particularly where the service is labour-intensive and resembles a supply of staff rather than an outsourced service, such as where labour-intensive services are charged for on a “cost plus” or “time spent” basis.
We await the draft legislation to see whether there is an exemption for professional service firms that second staff to clients (as proposed in the consultation).
A key action for all involved in staffing supply chains is to start establishing, over the next few months, safe contract models which work commercially and financially at the same time as minimising risk and reassuring engagers about tax debt transfer risk.
Many will have started to do so as a result of changes to the taxation of temporary workers already made by the government over the last two years but now they have the increased burden of addressing the impact of the changes to the travel and subsistence arrangements as well, and possible IR35 changes. All in the supply chain will need to consider whether the new plans they develop will fall foul of the wide range of anti-avoidance legislation now in place. They are likely to need legal advice on that point.
How we can help?
We have been working with many companies over the last six months to help them understand the impact of the changes and to develop new business models to reduce risk for them and their engager clients.
We are offering fixed price consultations for any business affected by the changes. In these consultations we:
- review your current arrangements and types of worker/types of engager, and
- review other legal and commercial developments affecting you at the moment, and
- discuss the best options for your business taking all factors into account, followed up with a written report.
Engagers will increasingly be looking to their staffing suppliers for reassurance about the likely future risks in this area. Exploring the options and developing lower risk models now will enable you to provide this reassurance.