The government’s proposals to ban supervised, directed or controlled (SDC) contractors from claiming tax relief on travel and subsistence costs could spell the end of umbrella companies, according to the lobby group All Umbrella Companies Are Equal (AUCAE).
The concept of “supervision, direction and control” represents a new approach to employment status. To simplify the underlying test, HMRC proposed that any one of these conditions could trigger the restriction on travel and expenses relief.
Under the proposals the “engager” or end-client will be responsible for confirming with the “employment intermediary” whether the contracted worker is acting under a right of supervision, direction or control. The intermediary would then be responsible for any tax debt incurred, except where it can prove the engager provided false information about how the work was done.
AUCAE’s response to the HMRC consultation document on travel and subsistence was based on a survey of more than 700 contractors. The group’s key point is that the suggested SDC test was based on legally dubious principles and supported with example scenarios that were so simplistic that they had little relevance to what happens in real life.
“The main issue everybody has with the proposals as is that there’s been a single determinate applied to it – the right to control. Our lawyer believes it’s legally questionable because there have been standard legal tests going back to the Ready Mixed Concrete case that rely on multiple 4 factors to determine whether it’s a contract of services [employed] or contract for services [external contractor],” AUCAE founder Lisa Keeble told AccountingWEB.
“As far as I can make out there’s never been an employment status test tried on this one element. That’s our major concern – how it’s going to work? The examples HMRC gave in the original document were so black and white they didn’t represent what happens in business.”
The SDC criteria have been defined so broadly, however, that all freelance contractors operating through limited companies are likely to be caught, ACUAE argued, posing a significant threat to the umbrella industry
“It’s taking us back to pre-1999, when travel and subsistence expenses weren’t allowable,” Keeble said. “In those days there was a much smaller transient workforce. The government says contractors and freelancers have got to be brought in line to make it fair, but they’re comparing apples with oranges. The working situation has changed. Contractors are not the same as permanent workers – they’re doing a different job. If businesses wanted employees, they wouldn’t hire contractors.”
Comments from AccountingWEB members echoed the impracticalities highlighted by AUCAE. Instead of achieving HMRC’s aim of a “level playing field” for all taxpayers, the likelihood is that by targeting unscrupulous umbrellas, HMRC was once again catching personal services companies in its badly defined net.
Based on responses to the AUCAE survey, Keeble said the travel and subsistence proposals “seemed to provoke contractors in a way I haven’t seen since IR35 came out”.
No business is going to take on a financial risk to cover the tax relief on contractors’ expenses. So the logic of the SDC test would imply that if contractors were being treated as employees for tax purposes, then they should be entitled to the benefits of employment – or put their fees up to cover their extra costs.
“The perceived advantage [for contractors] is nowhere near as big as people think it is. There are changes ahead for IR35 and dividend tax. If everything goes through as proposed, contractors will be worse off than permanent employees, and HMRC will have damaged the contracting industry,” Keeble said.
The AUCAE campaign group is aware of abuses within the industry and rogue operators that promise contractors 80%-90% take home pay rates based on questionable tax arrangements, but points out that the legislation that has been put in place to restrict activity hasn’t worked.
“Their job would be easier if rather than saying what they don’t want they said what they do want: The only acceptable model for an intermediary x, y, z,” said Keeble.
The proposals also raise some urgent practical points for tax advisers, according to AccountingWEB tax policy editor Rebecca Cave. She commented: “Contractors and others currently working through their own personal companies may still be outside IR35 in 2016/17, but the new tighter definition of ‘supervision, direction or control’ will mean the worker will not be able to claim travel and subsistence expenses for getting to his client’s site to work. This will make it uneconomic for many contractors to continue to work on contracts located some distance from their homes.
“How many accountants have realised that this change in the expenses regime is likely to apply from 6 April 2016, and warned their contractor clients?”
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