Travel and Subsistence: HMRC changes course
Following the summer consultation on‘Employment Intermediaries and Tax Relief for Travel and Subsistence’, many were expecting HMRC’s proposals to be automatically implemented when the Finance Act 2015 was published – despite objections. Jennifer Adams submitted a response to the consultation document on behalf of AccountingWEB members, and now looks to see whether the objections raised by members have been acknowledged.
The policy document ‘Income Tax: employment intermediaries and relief for travel and subsistence’ does not give much in the way of detail, just describing the issues and the new measures in general terms. The background and details are to be found in the ‘Summary of Responses: Employment Intermediaries and Tax Relief for Travel and Subsistence’.
It is a lament of many AccountingWEB members that HMRC do not listen to suggestions, but these documents could be seen as proof that if enough individuals, groups or organisations make their views known then HMRC will at least consider amending their proposals, even though the actual substance remains.
HMRC received 163 responses to this consultation from contractors, the recruitment sector, charities, trade unions and businesses. In addition, a total of 17 ‘stakeholder events’ were attended by over 300 individuals. Inter alia there were responses from such big players as the CBI, G4S, ICEAW, UNITE, 22 ‘umbrella companies’ and 18 employment agencies including Hays.
Who will now be affected?
The consultation document centred on the claim for tax deduction of travel expenses incurred from home to place of work and of subsistence expenses incurred by individuals working via ‘employment intermediaries’: such entities being defined as ‘an entity, including a company, a partnership, or an individual, which interposes itself’ (i.e. sits between) ‘a worker and the ‘engager’, as part of an arrangement for the worker to provide their personal services to that ‘engager’’.
HMRC was particularly looking at ‘umbrella’ service companies, employment businesses (i.e. agencies who supply workers for services) but personal service companies (PSC) were also dragged into the net.
It was the inclusion of all PSCs that most concerned our members, and after representations the rules will not apply to PSCs who have not already been caught under IR35. HMRC does not actually say that they have backed down, but under the guise of appearing to be concerned with there being one rule to consider in deciding whether an entity is IR35 and another in deciding whether the travel rules are relevant, the text states: “The government agrees that it would be overly complicated and burdensome for a PSC to have to consider two tests for each engagement it undertakes. The proposals have therefore been amended, so that the new measures will only apply to a PSC’s contract when it falls within the ‘intermediaries’ legislation.”
‘Supervision, direction or control’ tests resurrected
HMRC withdrew these three tests for IR35 as of 6 April 2015, but they have been resurrected for use specifically in deciding eligibility for travel and subsistence expenses. It is stressed that the use of such tests ‘will not impact on a worker’s employment status, or wider employment rights’. In other words, they will be taking a wider view of whether an entity is IR35 rather than relying on the tests to reach their decision.
HMRC believes that so long as they give what they term ‘clear guidance’ there should be no confusion when having to decide whether the new travel rules apply or not. They intend to review their existing guidance and issue additional guidance before the measures are enforced.
In the original consultation document there was a great deal of line space taken up with the question of how to decide whether a ‘place of work’ was ‘permanent’ or not. If it was permanent then the new travel tax deduction restrictions would apply, but there is no mention in the final document.
Liability for getting it wrong
HMRC wants to place responsibility for policing these new rules squarely on the shoulders of someone other than themselves, and with this in mind came up with two options.
It would be the responsibility of the end user (the ‘engager’) business to confirm with the ‘employment intermediary’ as to whether the contracted worker is working under ‘supervision, direction or control’. If so agreed then the restrictions would apply. Should HMRC subsequently find that tax relief has been claimed incorrectly, the engager would be made ‘jointly and severally liable’ for any tax unpaid by the ‘intermediary’ business.
Again it was intended that the ‘engager’ would be responsible for confirming with the ‘employment intermediary’ that the contracted worker was working under the ‘right of supervision, direction or control’. If so agreed, then under option 2 the ‘employment intermediary’ would remain responsible for any tax debt incurred, only transferring the liability to the ‘engager’ should the ‘intermediary’ have been misled about the nature of the work.
Option 1 caused most concern amongst respondents, including AccountingWEB members. It was felt that the risk to the ‘engager’ of having to pay HMRC if the rules were found to have been applied incorrectly by the ‘intermediary’ could mean that an ‘engager’ would be reluctant to agree that any worker was not under ‘supervision, direction or control’. Option 2 was also derided as it was felt that it would be difficult to enforce.
Alternative option – suggested, accepted and implemented
In the consultation an alternative option was suggested. The decision of ‘supervision, direction or control’ remains but now any tax debt arising from the deliberate misapplication of the rules is to be transferred ‘jointly and severally’ from the ‘intermediary company’ to its director(s), so that the ‘engager’ is not involved. It is intended that these rules be implemented where it can be shown that the ‘intermediary’ had knowing failed to apply the rules correctly.
In addition, a second transfer of liability is to be introduced, moving the tax debt to another relevant party where it can be proved that that party provided a fraudulent document which lead the ‘intermediary’ to being misled into making a claim but should not have done so. The reasoning behind this approach is to discourage directors of ‘intermediaries’ companies from making an incorrect claim, finding that they have a tax liability and then liquidating the company, thus avoiding the tax arising from a deliberate failure to apply the rules. The tax liability can now be claimed from the ‘engager’ or other party involved in the contract.
- Interestingly the table under ‘Summary of impacts’ shows the same figures for tax receipts in the consultation paper as in the final policy document. Probably an error, but if correct this proves that the non-IR35 PSCs would have produced little, if any, income for the Treasury under the original proposals – the main income probably coming from ‘umbrella’ companies and agencies.
- As these rules are only relevant to PSCs caught under IR35, will this mean that HMRC will be hardening their efforts to bring more PSCs within the IR35 rules? We already know that HMRC have increased the number of staff looking into IR35 situations.
- It is pleasing to see that HMRC’s suggested options have been replaced. It was worrying that HMRC had originally intended to place the onus of compliance on the end user (‘engager’) rather than solely on the ‘intermediary employer’ who, after all, is usually the entity that pays the tax bill.
- The question as to how the ‘intermediary’ will prove that they had been ‘mislead’ by the ‘engager’ has been answered, in that there needs to be a ‘fraudulent document’ produced by the other party. As it is more likely that these new rules will affect workers working under ‘umbrella’ companies and employment agencies, rather than any other PSC, then this section will probably be irrelevant as template contracts will be used.