Finance Bill 2016: PSC contractors given a get-out
Contractors have ducked the “killer blow” as yesterday’s draft clauses in Finance Bill 2016 contain largely expected measures, not a feared plan to payroll some PSCs.
So while the leaked plan to cap contracting at “month one or two” may still surface in the government’s reply to the ‘IR35 discussion document’, it will not take effect from April 6th.
“[HMT’s David] Gauke didn’t pull any surprises out of the bag,” says ex-tax official Carolyn Walsh. “[But] a one or two-month cap…may still be a possibility if, that is; it wasn't a ruse.”
Nevertheless, from April 6th 2016, legislation will prohibit tax relief on Travel and Subsistence expenses for umbrella and PSC workers under ‘Supervision, Direction or Control.’
Due to net the exchequer a projected £505million between 2015 and 2020, the T&S legislation will affect 430,000 people a year, who are employed via umbrellas or agencies.
It will apply automatically, meaning contractors will be ‘SDC’ unless shown otherwise because the government claims, “this [SDC] is how an individual carries out their duties.”
An accompanying impact assessment on the T&S legislation, published yesterday by the government alongside its response to the T&S consultation, goes onto claim that there will be only a “negligible impact” on business.
But in the following sentence, firms are warned of a “rise in the direct cost of hiring temporary and contract staff” via intermediaries who cannot prove they are free of SDC.
A further burden officials admit to is that end-users “will also need to identify where a worker is under SDC (or the right thereof) in the manner they under take their work.”
And there’s a third burden. End-users will “need to agree the process for ensuring this information is passed to the employment intermediary.”
‘Get-out’ for PSCs
Perhaps aware that it was meant to be presenting the draft law as not having much impact on enterprise, HMRC then spoke of a sort of ‘get-out’ for PSCs which was hinted at in Autumn Statement 2015:
“This [information process] will not be necessary for those who are engaging a PSC, as the eligibility for relief will be determined based on whether or not the intermediaries legislation (IR35) applies.”
This clarity and certainty for PSCs is welcome, according to the Association of Independent Professionals and the Self-Employed. In a statement yesterday, the association said:
“This means freelance businesses will rightfully be able to claim the tax relief, subject to future possible changes to IR35.”
Paula, Martin, John & Jim
Ms Walsh, a director at payroll firm CWC Solutions confirmed: “[For T&S tax relief eligibility] contractors who are not paid through an agency only have to consider IR35, [although IR35 itself] is in a state of change”.
To help affected parties, HMRC yesterday unveiled the examples of Paula, Martin, John and Jim. The latter, a fictitious umbrella company worker, can claim despite being under SDC.
In fact, in the following example from HMRC, Jim can claim because he has one engagement and is going to a second or temporary workplace, under the same engagement.
“Jim is employed under an overarching contract of employment with X Ltd, meeting the tests of supervision, direction or control”, the example begins.
“During the three months Jim os [sic] working in Crawley in X Ltd’s warehouse he is asked to spend three days working at X Ltd’s other warehouse in Shoreham.
“He is not entitled to relief for travel and subsistence in respect of travel to and from Crawley, but is entitled to a deduction…for the travel and subsistence costs to go to Shoreham as this is travel to a temporary workplace and is not a new engagement.”
‘Vague and unworkable’
Similarly, HMRC says that site workers will continue to be able to claim relief on their travel and subsistence, where they are travelling to different sites as part of the same engagement.
But where site workers use an intermediary and the manner in which they undertake their role is under SDC, and if they travel to the same site for all, “or almost all”, of the engagement, then they “generally will not receive relief for their travel costs,” says HMRC.
“The test [of SDC] is vague and unworkable,” reflected Julia Kermode, the chief executive of the Freelancer and Contractor Services Association (FCSA).
“Almost 50% of contractors do not claim the travel and subsistence expenses that they are due, which dispels one of the arguments that expenses are systemically exploited.”
In a statement, the FCSA added: “The government is determined to penalise the flexible workforce on which it relies to help grow and develop the UK economy. It makes no sense”.
‘Liability may be transferred to the directors’
Potentially even more unwelcome for FCSA members, it seems that the government wants to penalise professionals personally. New draft guidance notes on the T&S legislation state:
“If the employment intermediary has not applied section 339A and not deducted tax and NICs and accounted for them on an amount of travel and subsistence, then that liability may be transferred to the directors of the intermediary.”
Also from April, it will be the responsibility of the intermediary to confirm that tax and NICs relief for travel and subsistence expenses from ordinary commuting are not available.
But, “if the intermediary is misled by the provision of a fraudulent document by the client or a ‘relevant person’ then the obligation to account for the PAYE and NICs which should have been deducted…for travel and subsistence can be transferred to the client or ‘relevant person.’”
In other words, there will be a MSC-style debt transfer provision with the effect that an end-user could be saddled with the avoided tax, as could a person who, as a UK resident or business owner, is “connected with the client or the employment intermediary”.
This person is a third-party like a UK-based agency, which is intermediate in the contract chain, and which has contracted with the umbrella company, advises legal firm Egos.
The firm also told ContractorUK: “As had been expected, there is a network of debt transfer provisions, intended to give other parties in the contract chain an interest in ensuring that the primary provisions are taken seriously.
“[But] in the case of a PSC, there appears to be no provision for transfer of the primary liability … [yet] there may be a transfer to the PSC’s own directors in the event of non-payment.”
‘Good news for PSCs’
Yet for PSCs who are truly independent and not ‘disguised employees’, they can still claim tax relief on T&S expenses after April 2016, points out Paul Gough, managing director of Intouch Accounting.
He said: “HMRC has listened to stakeholders [and] have made it clear with this draft legislation that PSC contractors working outside IR35 are indeed ‘self employed’ and not the same as umbrella workers.
“They do enjoy different risks and rewards [to umbrella workers] and as a consequence can claim tax relief for T&S costs. So this is good news for anyone already running their own limited company or thinking about going limited.”
Another practicing accountant, Ms Walsh, confirmed: “Genuine [PSC] contractors are not the target. [But the T&S legislation] is a targeted action, and the first in the firing line will be the companies such as those which pay workers under CIS or via a PSC model with no regard to agency legislation, along with those which abuse tax rules on tax relief under a PAYE umbrella scheme.”