Draft 2016 travel and subsistence legislation – Briefing 4: The impact on outsourcing arrangements and other key aspects of the legislation

Written on 16 Dec 2015

On 11 December 2015 we issued a briefing looking at the key points and likely problems with the draft travel and subsistence legislation released on 9 December 2015, on 14 December 2015 we looked at how umbrella models would be affected, and on 15 December 2015 we looked at how PSC arrangements would be affected. Those were the first three briefings in a series of briefings about the draft legislation.

In this fourth and final briefing we comment on the impact of the proposals on outsourcing arrangements and other issues arising from the legislation.

What about labour intensive outsourcing arrangements?

Outsourcing arrangements appear not to be caught because they will not involve the business of labour supply. That means that they can pay their employees relevant travel and subsistence expenses (“T&S”) tax free.

The Government has decided against a detailed definition of “supplying labour”, but it appears to us that if a supply is more or less entirely on a “paid for output”/”deliverables” basis rather than on a “time and materials”/”controlled by hirer” basis then the new measures will not apply. 

The secret of course will be for labour intensive outsourcing companies to ensure that their supplies cannot be construed as labour supply or some sort of artificial arrangement with the main purpose of the avoidance of the new tax measures.

There was an unexpected amendment to the Finance Act 2015 relating to the abolition of dispensations. S289 E of ITEPA states that if an employer receives an amount and takes a margin and then, instead of paying the worker their agreed pay plus expenses, the employer:

(i) works out the expenses and then treats the rest as salary/pay/bonus etc.; and
(ii) the main purpose or one of the main purposes of this is the avoidance of tax or NICs, then the expenses are not payable tax free.

This has not been consulted about and could possibly extend beyond umbrella to other employment intermediaries such as labour-intensive outsourcing companies. This will become effective on 6 April 2016 regardless of the outcome of the draft T&S legislation. 

Other likely developments

  • Many hirers may press on with direct engagement models offering a range of T&S and VAT savings and other legal and commercial benefits. Staffing companies and payroll companies are vital components of this sort of model.
  • Sole trader models may become more popular given new dividend tax measures affecting PSCs.
  • Workers (such as domiciliary care workers) who work exclusively at the home of clients will not be caught and can be paid T&S tax free.
  • Models and actors were excluded from the 2014 intermediaries legislation but are caught by the 2016 legislation.

What next? 

A further consultation on the draft legislation, open until 3 February 2016, will aim to ensure that the legislation works as intended. As such, the further consultation will focus mainly on the technical wording of the new legislation rather than re-open the policy debate relating to the proposed legislation.

On 20 January we are running a seminar that will look at the future for flexible workforces, and why staffing and umbrella companies need to act now to ensure that their offerings keep pace with legislative change and offer commercially sensible arrangements. Find out more >

In the meantime we are offering fixed price consultations for any business affected by the changes. In these consultations we will:

  • Review your current arrangements and types of worker/types of engager.
  • Review other legal and commercial developments affecting you at the moment.
  • Discuss the best options for your business taking all factors into account, followed up with a written report. 

We will look at the detail of the proposals and their impact on the various options at which companies have been looking.

  • Usage of PSC models: what is safe going forward?
  • What umbrella arrangements may still work?
  • How can outsourcing arrangements operate outside the new regime?
  • How can direct engagement models offer a viable and profitable alternative?
  • How can you reduce risk of claims by disgruntled workers if there is no option other than to push down take home pay rates?

Our advice is confidential and protected by legal privilege. Generally speaking, only solicitors registered by the Solicitors Regulation Authority and practicing barristers benefit from legal privilege.