HMRC has published details of the proposed removal of tax relief on travel and subsistence expenses for umbrella workers, personal service companies and workers operating via other “labour service” intermediaries.
These tax efficient expenses arrangements are of course what, in many cases, make umbrella company arrangements worthwhile.
The proposal includes tax debt transfer measures which could make hirers and staffing companies liable for tax compliance failures by umbrella companies and personal service companies.
The Chancellor also announced in his Budget statement that there will be further measures to address perceived tax avoidance by personal service companies, with a consultation later this year on changes needed to IR35 to improve effectiveness. This may address the remaining NICs and other tax savings that personal service company workers would otherwise still enjoy after the proposal announced yesterday is implemented.
A 12 week consultation (to 30 September) will now start relating to the expenses legislation and draft legislation will be published in the autumn, to come into force on 6 April 2016.
There will also be a consultation this summer about the need to improve IR35.
Alongside this there will be a broader review by the OTS on the tax treatment of expenses (continuing the work the OTS has done in this area over the last few years), but the legislation proposed yesterday will be introduced before the OTS finishes its exercise.
What do the proposals say about the detail of the 2016 umbrella expenses legislation?
The new measures will apply to individuals who 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 of any person.
This is, as expected, a similar test to the one used for the intermediaries legislation last year. It has been confirmed that the supervision, direction or control test will be applied in the same way and under the same guidance as provided for the 2014 intermediaries legislation.
Interestingly, the consultation document states that HMRC will be defining what an employment intermediary is in the forthcoming legislation. Currently the proposed definition appears to be ‘an entity, including a company, a partnership, or an individual, which interposes itself between a worker and the engager, as part of an arrangement for the worker to provide their personal service to the engager.’ There is a proposed exemption for professional service firms that second staff to clients, with the key test appearing to hinge on whether the supplier’s business is “mainly” or “substantially” the “supply of labour”. It will not be straightforward for the parliamentary draftsmen to find wording which gives certainty about who is and who is not affected.
All in the staffing supply chain will need to follow the consultation carefully. It is important to try to make sure that the resulting legislation is as clear and focused as possible, and not vague or unintentionally damaging to innocent victims. Clear definitions and clear defences need to be included in the legislation so that everyone in the supply chain knows whether they are caught and if so what they need to do to avoid liability.
In the meantime the key action for all involved in the supply chain 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 hirers about tax debt transfer liabilities which might otherwise pass to hirers. If there are incidental tax advantages or cost efficiencies with some models that is fine. Otherwise, the sorts of schemes that have been promoted by some tax advisers will become very risky, and 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.
This is a blow to both umbrella companies, who will have to find new ways of contracting to survive (and we believe many will), and to staffing companies, who will face risk of tax debt transfer (and hirer demands for indemnities). Staffing companies and hirers will have to increase their vigilance and checks, and consider the types of workers that it will be safe for them to use going forward. Suppliers and hirers will no doubt be starting a dialogue about whether it is fair to expect suppliers to bear all indemnity risk if in fact it is the hirer’s behaviour which triggers the tax liability.
The consultation period ends on 30 September 2015.
How we can help
We have done extensive modelling over the last six months to consider how these measures (which have not surprised us) will affect all in the supply chain.
As a result we can now provide fixed price consultations for any business affected by the measures. In these consultations we will review your current arrangements and types of worker/types of hirer, and other legal and commercial developments affecting you at the moment, and discuss the best options for your business taking all factors into account. We will follow this up with a written report. We suspect that hirers will be looking to you for reassurance about the likely future risks in this area for them and we will make sure your future models provide this reassurance.