Travel & Subsistence Expenses (yet another unexpected twist!)
So last week (24/03/16) we saw the publication of the Finance Bill 2016 which contains within it the various changes that will be made to tax law that will impact upon the ability of workers operating via employment intermediaries to claim tax relief on travel and subsistence.
Finance Bills aren’t particularly easy documents to read; the language is often convoluted and to make sense of it all you have to constantly cross-reference everything with the numerous other bits of pre-existing legislation to which the Finance Bill adjustments relate.
Here’s a brief summary of the new revisions to the T&S restrictions.
Changes to the definition of a Managed Service Company (MSC)
HMRC are widening the definition of a Managed Service Company (MSC) when it comes to PSC’s and a T&S tax relief. This change comes about by the removal of the previous requirement that remuneration had to be received in ways other than employment income for it to be considered a MSC. So this means that a PSC will now be classed as an MSC if:
- The company’s business consists wholly or mainly of providing, directly or indirectly, services of an individual to third party clients
- The individual (worker) supplying their services to the third party client receives payments (or an aggregate of payments and benefits) from the service company equal to the greater part of the sums received by the service company from the client for the services provided by the worker
- There is an “MSC Provider”, and that provider is involved with the company
Points 1 & 2 will nearly always apply to any PSC, but point 3 will not apply if we’re talking about a PSC that is provided with bona fide accountancy services by an accountant who is “providing legal or accountancy advice in a professional capacity” (3a Section 668A Finance Act 2007).
Under the previous proposals, HMRC considered it “overly burdensome” for PSC contractors to have to consider both IR35 and SDC, and as such access to T&S tax relief was to be determined via the IR35 test that was already being used to gauge access to dividend payments, instead of the separate SDC test being used by umbrella company employees. Moving forward, however, the PSC will now have to consider SDC in addition to IR35 in scenarios where any of the following apply:
- The PSC is caught by IR35 but is classed as a MSC
- The PSC is not caught by IR35, but were the PSC not present as an intermediary, the worker would be considered an employee of the client/end user
- The PSC is not caught by IR35, and the worker wouldn’t be considered an employee of the client/end user in the absence of the PSC, but the PSC is an MSC
It’s likely that these last minute changes were introduced to try and curb the use of MSC-inspired PSC services that were specifically being promoted to umbrella employees as a way of them avoiding the SDC restrictions that will apply to umbrella companies post-6th April, whilst at the same time not requiring the worker to take on the full range of responsibilities normally associated with running a Limited company. Such schemes were essentially MSC’s except for the fact that there was no non-employment income being received, but now that that exemption has been removed, these schemes now become classed as MSC’s.
HMRC were always conscious of the fact that these new T&S restrictions could result in a decline in the popularity of umbrellas and the subsequent increase in use of other types of employment intermediary. These latest revisions can very much be seen as a last minute attempt to curb the use of a specific type of alternative employment intermediary which was being promoted to umbrella workers en-masse, and which equates to the “organised misuse of personal service companies (PSCs) to avoid the restrictions”. In short, this is HMRC’s attempt to eliminate a specific “workaround” to their original proposals by bring any workers that use them back within scope of the SDC test.
Changes to the Debt Transfer Model
A second area of changes concerns the debt transfer model that it being introduced to police the new T&S restrictions. More specifically, final revisions now mean that umbrella company directors can be held personally liable for a T&S tax debt if the umbrella company has determined a lack of SDC, but has done so without being provided with evidence from which it would be “reasonable in all the circumstances” to determine a genuine lack of SDC. The mere assertion by a worker that they lack SDC is not considered an acceptable level of evidence. This revision would clearly seem to suggest that HMRC don’t like the idea of workers and employment intermediaries declaring a lack of SDC without going through a proper due diligence process that involves all parties in the contractual chain. The idea that a worker can “self-certify” a lack of SDC now seems a non-starter.
So what do these two changes mean in practice?
HMRC have essentially done two things here; firstly they’ve tightened-up on the evidence requirements for determining a lack of SDC which will now mean that all parties in the contractual chain will be required to play a more active role in instances where a lack of SDC is being made (this is on the basis that it’s almost certainly not going to be viable for a worker to be deemed to be lacking SDC without evidence from the agency and the client). In addition to this, more workers than were originally anticipated will now be subjected to the SDC test on the basis that a percentage of PSC’s will now be brought back within the scope of the SDC test on the basis that they also qualify as MSC’s.
As a provider of compliant payroll services and bona fide Limited company accountancy services, Liberty Bishop welcomes these last minute revisions due to the impact that they will have on those that try to avoid the legislation changes, and those that try to help them do it.