New tax year: new world for UK staffing companies

Written on 6 Apr 2016

6 April 2016 saw the coming into force of s339A of the Income Tax (Earnings and Pensions) Act … or in other words the end (for the most part) to the payment of tax free travel, subsistence and accommodation expenses (“T&S”) to agency workers engaged via so-called umbrella companies. Dividend-based personal service companies (“PSCs”) are also affected. 

In addition, 6 April 2016 dividend tax changes start making the PSC model a little less rewarding for PSC contractors. 

We have issued a number of briefings to clients about these changes, and held numerous seminars and one-to-one meetings. 

The key points to note in light of developments in the last two weeks are as follows:

  • HMRC has issued further guidance today about the so-called SDC test. It does not change our understanding of how HMRC intends to police the existing intermediaries legislation and s339A – broadly speaking the test will (in HMRC’s view) be wide, and most types of worker supplied via a labour supply business will be deemed to be caught by the SDC test, making it hard for those workers to be paid T&S tax free. Guidance on Employment intermediaries: personal services and supervision, direction or control is available.
  • There is no guidance yet as to what a labour supply business is.
  • It is hard to see how umbrella companies can argue in most cases that their workers are not under SDC.
  • There has been a surge of interest in new types of small company (“SC”) models involving workers being engaged via small companies of which they may (or may not) be directors and shareholders, and benefiting from the small company NICs allowance and/or the flat rate VAT scheme. Some aspects of some of these models will work for some types of worker, but we urge all involved to treat them with great care – we believe there are significant risks with some versions of these arrangements, and HMRC has already issued two announcements about them. Not least disclosure of the arrangements to HMRC may be necessary.
  • For the moment the risk of tax debt transfer from umbrellas, PSCs or SCs to staffing companies or hirers is relatively low, unless the staffing company’s or hirer’s involvement in the arrangements oversteps the mark in various ways. However, there are a range of other risks for staffing companies and hirers whose supply chain involves more risky models, and tax debt transfer is still a possibility unless care is taken.
  • Any surge in use of traditional PSCs and/or the SCs may be met by further legislation, and in the case of PSCs there is likely to be new IR35 related legislation in 2017, vastly reducing the usability of PSC models in the public sector and many public sector funded projects.
  • Increasingly the new tax measures affecting the staffing supply chain involve the potential transfer of tax debt to directors of relevant companies. 

Anyone who feels under pressure to adopt a new scheme should take legal advice immediately.