A worker providing services to a business through an employment intermediary may soon have less scope to claim tax relief on travel and subsistence expenditure, and could create a liability for the business for which they work, says Phil Norton, a Legal Director at Clyde & Co LLP
It is a long-established principle of the UK tax system that people are unable to claim relief for tax and National Insurance contributions for any travel and subsistence costs (such as lunches) relating to their regular commute from home to work. But, tax relief is available for travel between a worker’s home and a temporary workplace – which, in some cases, is how it is treated if that worker has been hired through an intermediary. But the rules are likely to change soon.
When is a workplace temporary or permanent?
There are a number of criteria for determining whether a workplace is temporary or permanent, but in general a workplace will always be a permanent workplace if the worker:
- Goes to the same workplace in the course of a period of continuous work which lasts, or is likely to last, for more than 24 months; or
- Goes the same workplace for all or almost all of the time for which the worker is likely to hold, or continues to hold, the same employment (e.g. a fixed term contract).
What are the proposed changes?
The government intends to remove workers’ eligibility for tax relief if:
- they provide services to a business through an employment intermediary, such as an umbrella company or a personal service company (PSC)
- the business to which they provide their services has the right to supervise, direct or control their work.
It’s worth adding that a worker, employed through an employment intermediary, will not be able to turn an ordinary commuting journey into a business journey by stopping off on the way to carry out business tasks, such as telephone calls.
Here’s a link to the proposal document.
What is an employment intermediary?
It is defined as an entity, including a company, a partnership, or an individual, which sits between a worker and a business, as part of an arrangement for the worker to provide their personal services to the business.
For an employment intermediary to be caught by the new rules its business must be substantially in the supply of labour services. So, professional service firms, such as accounting and legal firms, which second staff to clients will not be affected as their main business is not the supply of labour services.
Supervision, Direction or Control
A business only has to have the right to supervise, direct, or control for the proposed rules to apply. It does not matter whether in fact this right is exercised..
HMRC defines supervision, direction and control as:
- Supervision is someone overseeing a person’s work, to ensure that the person is doing what they are required to do and that it is being done correctly to the required standard.
- Direction is someone making a person do his/her work in a certain way by providing instructions, guidance, or advice as to how the work must be done.
- Control is someone dictating what work a person does and how they go about doing that work.
It is likely that HMRC will deem a worker to be subject to the right of supervision, direction, or control if there are procedures, methods and instructions that they must follow. But that should not include statutory requirements, such as health and safety regulations, as all workers need to comply with such rules.
What about IR35?
In general, a worker will no longer be eligible to apply tax relief to travel and subsistence payments received for ordinary commuting where their contract falls within IR35 – the legislation designed to prevent contractors from working as disguised employees.
However, the tax relief restriction may apply even if the contract falls outside IR35’s requirements, if the worker’s services are subject to the right of supervision, direction and control as defined by HMRC.
Firms could face bills
Under the new proposals, the government is considering making the business benefitting from the worker’s services liable for any tax debt resulting from wrongly claiming travel and subsistence reliefs.
It would be the business’s responsibility to confirm with the employment intermediary whether the worker would be under the right of supervision, direction or control.
HMRC may hold the business, along with the employment intermediary, liable for the amount outstanding. However, if the business has provided false information about how a worker’s services will be provided, then the business may be held liable directly.
What you need to do
Contractors that currently claim tax relief for travel and subsistence costs will need to consider carefully whether that relief will continue to be available if the proposals are implemented.
Firms will need to determine whether a worker would be regarded as employed under the supervision, direction or control definition, and will want to consider ways to mitigate any resulting potential exposure they may have to HMRC.
It will be important to review the proposed changes once the draft legislation is available. The new changes are expected to come into effect from April 6 2016, and the government is expected to give an update on the proposals in the Chancellor’s Autumn Statement on 25 November 2015.
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