Writing today’s article is somewhat of a mixed blessing. It is wonderful news to report that for Personal Service Companies (PSCs) the draft legislation on restricting travel and subsistence relief has the stamp of ‘common sense’ all over it; but I also have to consume huge amounts of humble pie based on the concerns I had after the Autumn Statement.
In July, HMRC issued the Consultation on Employment Intermediaries and Tax Relief for Travel and Subsistence which ran to 30 pages and dealt with a number of controversial issues. The first was that the test for ‘Control’ became ‘Supervision’, ‘Direction’ OR ‘Control’ (SDC) with the consultation including all-encompassing definitions of what represented ‘Supervision’ and ‘Direction’. The second issue was the transfer of liability; and thirdly, was the indication that PSCs might have to consider two tests: IR35 and SDC. Finally, this was all set against a background of a separate Discussion Document on the Intermediaries legislation which inferred that the new test for IR35 might well be aligned with the agency rules i.e. considering whether each engagement involves supervision, direction or control.
Against this backdrop, and in my defence, this is why I found it hard to believe that HMRC would issue draft legislation that would state, as HMRC announced in the Policy Paper: ‘Income Tax: employment intermediaries and relief for travel and subsistence.’:
“Those individuals who supply their services through small limited companies, generally known as PSCs will no longer be able to claim tax relief or a NICs disregard for those contracts where they are required to operate the intermediaries legislation (commonly known as IR35), or they would otherwise be operating IR35 if they weren’t receiving all their remuneration as employment income.”
This has found its way into the draft legislation at ITEPA 2003 s339A(3) and it means that if an engagement is ‘caught by IR35’, then under the new legislation, it will no longer be possible to claim these travelling expenses, which seems entirely reasonable.
So how did HMRC arrive on this victory for common sense? It is clear that HMRC listened to the consultation respondents like Abbey Tax, who believed that HMRC’s intentions would move to a position of over-compliance and potentially do lasting damage to the flexible labour market. HMRC have explained their thinking in the Summary of Responses, which was also issued on 9 December 2015.
In respect of the Supervision, Direction or Control Test the response document concluded that:
“The government does accept though that it would be burdensome for PSCs to be required to apply two separate tests for each of their contracts. The government will therefore amend its proposals, so that the new measure will only apply to a PSC’s contract when it falls within the intermediaries legislation, or would do if the worker was not receiving remuneration as employment income.”
So there are not two sets of tests for PSCs, the current IR35 tests based on personal service, control and mutuality of obligations – as set out in Ready Mixed Concrete – still apply.
On the subject of transferring liability, it was pleasing to read that the Government had listened to the solution put forward by the respondents to the round table events held by HMRC. The response document concludes on page 5 that there is an alternative option to those it had suggested:
“This option transfers, jointly and severally, any debt arising from the deliberate misapplication of the rules from the employment intermediary (the business employing the worker) to its director(s). The transfer of debt would only be applied where it could be shown that the employment intermediary had knowing failed to apply the rules correctly, when they had been told by the engager that relief on travel and subsistence should not be available.”
So the idea of aligning the tests to the agency rules has disappeared and the rumours that abounded in the last month about engagements being ‘caught by IR35’ based on the length of the engagement have also been quashed. So all-in-all, it’s great news.
Clearly denying tax relief for PSCs where the engagement is caught will create income for the Treasury. However, in HMRC’s submission to the House of Lords Select Committee Report (February 2014) on IR35, it was estimated that there were some 265,000 PSCs of which only 10,000 declared themselves caught by IR35. Intuitively, it seems highly unlikely that more than 95% of all engagements are ‘not caught’ by IR35, and it is hard to see how this draft legislation will tackle non-compliance.
HMRC’s response to the issue of compliance is found on Page 17 of the response document:
“These changes are aimed at preventing workers, engaged through an employment intermediary, and their employers, from benefiting from tax and NICs relief for home-to-work travel expenses. The government will take action to tackle tax avoidance wherever it is identified and ensure no individual or business benefits from an unintended tax advantage. HMRC continue to develop new ways in which avoidance can be tackled.
As part of its risk based compliance activity, HMRC is undertaking enquiries into a substantial number of employment intermediaries, including umbrella companies and employment businesses. HMRC have a number of ongoing investigations into businesses that are regarded as high risk and HMRC continue to look at a range of ways of tackling non-compliant employment intermediary arrangements.”
There is no specific detail in here, but it doesn’t suggest that HMRC have given up on enforcing IR35. Contractors will still need to know the ‘IR35 status’ of their engagements; not least because of the double whammy of applying the deemed calculation AND having no scope to claim travel and subsistence relief if the engagement is ‘caught by IR35’.
That being the case, we intend to remain at the forefront of providing a cost effective and comprehensive contract review service, as well as offering insurances to meet the cost of a tax investigation if the Inspector comes knocking AND tax losses insurance to protect a contractor’s tax position. The issue of IR35 hasn’t gone away; nor will Abbey Tax!
Author: Paul Mason, National Contractor Manager
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