Contractors' Questions: Who's liable if I claim expenses but am ‘SDC’?

Contractor’s Question: As an umbrella company contractor, if I was to keep claiming tax relief on travel, food and drink expenses past April 2016 while being subject to Supervision, Direction or Control (SDC), what’s likely to happen?

Which of us would receive a tax demand from HMRC, me or my umbrella? I’d like to know who, according to the draft legislation, would be first to get the demand and, if that first party can’t or won’t pay, who then does the demand move to for payment?

Expert’s Answer: It’s not going to be your problem if you claim tax relief on expenses and shouldn’t; it’s going to be the umbrella’s. In fact, it will be your umbrella’s responsibility to evaluate your claim, pay or refuse as appropriate, and take responsibility for the consequences of their decision if they get it wrong.

If (in reaching that decision) they relied on a fraudulent document intended to constitute evidence that there was no SDC as to the manner you undertake the work, and provided by a ‘relevant person’, then the liability shifts to the 'relevant person.’

Or, if (in reaching that decision) they relied on some other evidence from any other person, intended to constitute evidence that there was no SDC as to the manner, and that evidence was found to be wrong, then the buck stops with the umbrella itself. 

Otherwise (i.e. if the umbrella got no evidence from anyone), then (if unpaid) the liability may pass to your umbrella company’s directors.

For the avoidance of doubt, and to inform other contractors who may be wondering about who the liability rests with, the position seems to be:

In the case of a PSC:

  • there appears to be no provision for transfer of the primary liability (which in this case will be based on IR35, not ‘SDC as to the manner’)
  • there may be a transfer to the PSC’s own directors in the event of non-payment

Otherwise (i.e. if not a PSC),

  • a ‘fraudulent document which is intended to constitute evidence that’ this legislation does not apply (i.e. that there is no SDC as to the manner of working) will generally shift the liability to operate this legislation from the employment intermediary (umbrella) to a ‘relevant person’ who has provided the fraudulent document
  • ‘relevant person’ means a UK-based person,
    • other than the client, the worker, or a person connected with either the client or the intermediary,
    • who is party to a contract with the intermediary, under or in consequence of which the services are provided, or the intermediary makes payments in respect of the services
    • ‘intermediary’ here includes a person connected with the intermediary
  • if that person is a company, and fails to pay PAYE and NIC due under these provisions, then such liability may pass to that company’s directors

Subject to both of the above,

  • The primary liability  falls on the ‘employment intermediary’ – which seems to be the company directly contracting with the individual and operating PAYE and NIC (this will generally be an umbrella – though it could be an agency, itself operating an overarching employment arrangement) - it is the umbrella company who will be responsible for ensuring that either
    • they can show the legislation does not apply (by demonstrating that they had been provided with evidence from any other person to show the absence of SDC as to the manner of working, or
    • they do not reimburse travel and subsistence without first deducting PAYE and NIC
  • if that company has not been provided with evidence to show that there is no SDC as to the manner in which the worker provides services, AND fails to pay PAYE and NIC due under these provisions, then such liability may pass to that company’s directors.

The expert was Roger Sinclair, legal consultant at egos, a law firm specialising in the contractor sector.

Editor’s Note: Related Reading –

Finance Bill 2016: Travel & Subsistence Summary
How HMRC is revoking your right to expenses
How umbrella expenses will get tougher still

Friday 11th December 2015