When George Osborne sat down after delivering his 2015 Autumn Statement yesterday afternoon, the search of the small print began. What detail did the full blue report contain regarding travel and subsistence tax relief for PSCs?
On page 116 , we read:
“3.20 Employment intermediaries and tax relief for travel and subsistence – As confirmed at Summer Budget 2015, the government will legislate to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company or a personal service company. Following consultation, relief will be restricted for individuals working through personal service companies where the Intermediaries Legislation applies. This change will take effect from 6 April 2016.”
So how does this change things? Currently, if the Intermediaries Legislation applies (the engagement is ‘caught by IR35’), then the ‘deemed calculation’ should be applied by using HMRC’s IR35 Deemed Payment Calculator, which can be found here: https://www.gov.uk/guidance/ir35-what-to-do-if-it-applies#additions-and-deductions.
In simplistic terms, the fees earned by the PSC from the engagement are entered into the calculation as the headline figure, and we will assume this is the only income relating to the engagements in the tax year. From this figure, an amount of 5% of these fees is deducted to cover unspecified expenses. This becomes the ‘income’ figure in the IR35 Deemed Payment Calculator.
The deemed employment calculation also allows a deduction for the actual amount of certain expenses paid by the PSC in the year. These include contributions to an approved pension scheme, payments of salary and NICs (both employer’s and employee’s), and the payment of travel and subsistence expenses by the company to the worker to reimburse them for the cost of travelling to a temporary workplace (we have assumed that the 24-month rule does not apply).
The net amount is then apportioned between the employer’s NICs and the deemed payment which effectively becomes the individual’s ‘gross income’ and is taxed along the same lines as PAYE.
If the engagement is ‘caught by IR35’, then under the new legislation, it will no longer be possible to claim these travelling expenses – which for many contractors could be a significant amount – and this will mean that the deductions from the income figure will be lower and the net amount to be apportioned between the employer’s NICs and the deemed payment will be higher. As a result, the tax bill will be higher.
On the face of it, this seems fair – the individual is being taxed because they are a deemed employee and so they should be no better off than an employee paying taxes under PAYE. However, the question is: how will HMRC seek to determine IR35 from 6th April 2016?
If the current tests remain – personal service, mutuality of obligations and control – there still won’t be certainty, because the decision will continue to rely on case law and its interpretation, and an IR35 enquiry will remain an uphill struggle.
But if, as the recent Consultation on Employment Intermediaries and Tax Relief for Travel and Subsistence suggested, the test for ‘Control’ becomes: ‘Supervision’, ‘Direction’ OR ‘Control’; and HMRC are NOT prepared to move from the Consultation’s almost all-encompassing definition of what represents ‘Supervision’ and ‘Direction’ – or perhaps better put: their extremely narrow interpretation of what these two things do not cover – then it will be a mountain to climb!
Because the tax consequences will be harsher than they are now, contractors will need to know their IR35 position. Our advice to contractors and their advisers is clear: Get every engagement reviewed.
Furthermore, in order to police matters, surely HMRC will need to increase IR35 activity? If so, the next piece of advice must be to get some form of tax investigations (fee protection) insurance cover in place because an IR35 enquiry is an extremely expensive business.
And it won’t come as a surprise that Abbey Tax can offer solutions to both contract reviews and fee protection! Please contact either Paul Mason or Rebecca Walker on 0345 223 2727 for further information.
Author: Paul Mason, National Contractor Manager
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