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Our response to HMRC’s consultation document: “Employment Intermediaries and Tax Relief for Travel and Subsistence”

The following was submitted to HMRC on 30th September 2015

Summary Comments

Liberty Bishop Contractor Services Limited is opposed to HMRC’s proposals contained within the consultation document. We do not believe that the proposal to reduce the question of eligibility for T&S tax relief to the singular test of “supervision, direction, and control” (SDC) will have the desired effect of leveling the tax landscape, nor do we believe that this test has a satisfactory grounding in established legal principles vis-à-vis employment law and employment status.

We believe that the implementation of the proposals in their current form would have a detrimental effect on the UK economy, and would unduly penalise the mobile and flexible temporary labour market which is largely responsible for the UK’s economic recovery.

We do not believe that any of the proposals in this consultation document should be taken forward at this stage. At the very least any final consideration should be delayed until after the review from HM Treasury into Travel and Subsistence (announced 23/09/15). Our belief is that any simplification of the rules relating to T&S relief at the broader level being addressed by HM Treasury should also be sufficient to deal with any issues regarding T&S relief in instances when an employment intermediary is being utilised. If the intention is to “level the playing field” with respect to the tax landscape, it would seem prudent to first explore the possibility of developing a broader set of rules that are applicable and workable in all scenarios, rather than moving forward with a two-tiered approach that would see those that use employment intermediaries subjected to a separate framework with regards to their eligibility to claim T&S relief. 

Our responses to HMRC’s specific document questions

1: Do you agree that the structure of the proposed legislative changes will achieve the policy objectives?
No, we do not. We believe that in practice the SDC test will prove too difficult to be correctly administered by those parties that will fall within-scope of the proposed liabilities. Faced with these liabilities, we believe that most end-users will default to the position of SDC being present without adequately reviewing each scenario on a case-by-case basis. As a consequence we believe that the proposed changes will not only have a detrimental impact on those workers subjected to SDC (or the right to SDC), but that many workers who will genuinely lack SDC (or the right to SDC) will also find themselves disqualified from T&S relief because of the end-users unwillingness to declare a lack of SDC through fear that this may later be undermined by another entity in the contractual chain and/or challenged by HMRC.

Question 2: Will there be any consequential difficulties in administrating each engagement as a separate employment?
Yes, administering each engagement as a separate employment fundamentally undermines the concept and purpose of an overarching contract of employment. Since such overarching contracts are – at the previous request of HMRC – a central feature of the umbrella model, it is likely that the proposals in their current form will compromise the umbrella model as it currently stands. Should umbrella companies disappear from the market this will have two serious consequences. Firstly, it will likely result in a loss of employment rights and protection for workers who were once umbrella company employees but are now “independent” contractors. Secondly, the disappearance of umbrella companies from the market-place, and the subsequent mass migration of workers to alternative payment vehicles, is likely to lead to an overall reduction not only in the efficiency with which taxes are collected, but also in overall tax revenue for the exchequer.

Question 3: Are there any particular professions who will be significantly affected by these proposals?
As outlined in our response to question 1, we believe that these proposals will affect a wide range of temporary workers at the point of practical application. The SDC test is designed to focus on the actual working practices of an individual, so in that respect the workers profession has no bearing on their situation with regards to their eligibility to receive T&S relief except in instances where SDC (or a lack thereof) is an inherent and necessary feature of their role. In practice we believe that those who will be most significantly affected by these proposals are not those that can be categorised by profession, but rather those that can be categorised based on their earnings bracket. The reason for this (as discussed further in our response to question 4) is that we believe these proposals will automatically disqualify all umbrella workers from claiming T&S relief, and since the average earnings bracket of umbrella workers is lower than that of PSC workers, we believe that these proposals will disproportionately affect those on lower incomes whilst those on higher earnings (and therefore more likely to be using a PSC) will not be effected to the same degree, and this will be for reasons other than the variable of SDC.

Question 4: Will these changes result in a significant shift in the way those affected are employed? If so, what would this shift be and what would be the impact for the workers concerned?
Yes, we believe that significant changes may result from the implementation of the proposals in their current form. By removing T&S relief from workers who are deemed to be under SDC (or subject to the right of SDC), this legislation would seriously damage the viability of the PAYE umbrella model since all employees of the umbrella model would appear to be under SDC as a consequence of the terms of their overarching contract of employment. The overarching contract of employment exists independently of any single assignment that the worker may work on, and as a result would over-rule any need to assess a workers actual working practices on an assignment-by-assignment basis. In short, the use of the umbrella model would appear to equate to the automatic disqualification for the worker with respect to T&S relief.

Should the umbrella model be damaged in this way, the workers that had previously made use of the umbrella model will require an alternative mechanism in order to receive payments. Some may revert to in-house PAYE operated by the recruitment agency that placed them with the end user, but in many instances agencies do not operate in-house PAYE solutions, and in any case this option is unlikely to appeal to the individual workers given that it would not help them recover the losses suffered from the removal of T&S relief through the umbrella model. We believe a more likely response will be a mass migration of workers towards the PSC. This would not only provide the worker with alternative avenues for enhancing tax efficiency (flat-rate VAT registration and dividend payments) as a means of recovering the losses suffered by the removal of T&S relief, but this one-man-band Limited company option may also provide the worker with a more favourable employment intermediary through which they could simply ignore the restrictions placed on T&S relief in a way that they couldn’t were they not the owner/director of the employment intermediary, and instead were simply its employee (as is the case with the umbrella model).

Question 5: Would the definition of employment intermediary as proposed cause any practical difficulties? Please provide details and examples.
Yes, the definition of an employment intermediary specifically exempts professional service firms that second staff to clients. This exemption is on the basis that their business is not substantially in the supply of labour. This criteria seems at odds with the stated intention of levelling the playing-field by removing tax advantages that would not have otherwise been available were a different payment vehicle being used. Our belief is that professional services firms should be included within the definition of an employment intermediary. This would not only better level the playing field (and help avoid the shifts in employment that you are concerned with in the previous question) but it would also help reduce instances of tax discrepancy at the individual level where you may have two identical looking workers being treated differently for the purposes of T&S relief simply because one operates via a mechanism that falls within the definition of an employment intermediary, whereas the other uses a mechanism that falls out-of-scope of this definition.

Question 6: Do you agree with the definition of the terms supervision, direction and control and will these definitions cause any practical or commercial difficulties? If so, what will these difficulties be?
We agree with the definitions provided, but the problem with the SDC “test” is that these definitions lack legal precision (they are basically just ordinary use/dictionary definitions) and will therefore generate a broad spectrum of interpretations, both at the layperson level when the initial decision is being made (by the engager and/or employment intermediary) as to whether these constraints apply, but also at the legal/expert end of the spectrum when a specific case is being discussed in the context of established employment law principles. All of this will be further compounded by the fact that the current proposals do not even require the actualisation of SDC, instead they merely require that some entity in the contractual chain has the right to exert SDC should they deem it necessary to do so.

Question 7: Which option for a transfer of liability would work best to ensure future compliance, Option 1 or 2?
Given that SDC can come from any entity in the contractual chain, and that SDC does not need to be actually exerted in order to disqualify a worker from claiming T&S relief, the only fair transfer of liability would be either that all parties in the chain are equally liable (which would therefore encourage effective communication between contractual parties with respect to the issue of SDC), or alternatively that no party is held liable on the basis that no one party can be reasonably held accountable for the actions or intentions of any other entity in the chain. Any attempt to place liability at a particular level (or levels) in the chain at the exclusion of other levels within the chain is not only grossly unfair at a moral/ethical level, but also illogical given the current working definition regarding the application of SDC.

Should you wish to discuss any of the above in further detail, please do not hesitate to contact me.

Wesley Scott
Director at Liberty Bishop Contractor Services Ltd

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