Government to block expenses for 'controlled' contractors

Travel and subsistence relief will be restricted for umbrella and PSC contractors if their end-user supervises, directs or controls them, says Budget 2015, delivered earlier today.

Under measures to take effect from April 2016, tax relief for home-to-work travel expenses will not be available to such contractors if there is ‘SDC,’ says 1.250 of the Red Book.

“We will stop employment intermediaries exploiting the tax system”, confirmed chancellor George Osborne, addressing the House of Commons in his Budget speech.

"[We will be] clamping down on the agencies and umbrella companies who abuse tax reliefs on travel and subsistence [T&S]".

According to extracts ContractorUK has heard from a post-Budget briefing by HM Revenue & Customs, there will -- in effect -- be no relief on T&S for ‘broadly inside IR35’  contractors.

“The restriction on eligibility for T&S will apply to umbrella workers, agency workers and PSCs,” said the director of an umbrella company who was exclusively briefed by HMRC.

“But the restriction will only apply where there is a ‘look and feel’ of those workers being employees – as in where they are under their client’s supervision, direction and control.”

The wording in the Budget’s full report of “supervision, direction and control” differs subtly from that used in the false self-employment rules of 2014, points out law firm Egos.

In fact, those rules stipulate “supervision, direction or control” but, says the firm’s Roger Sinclair, “whether that’s anything [significant] is one of the details we’ll have to wait for.”  

Indeed, the government says that it will launch a consultation which, according to the umbrella company director, will in May or June ‘work out how they’re going to police it all.’

Another brolly director, Lisa Keeble of Contractor Umbrella, seemed to welcome the spirit of the government’s proposed removal of relief -- a removal which was predicted to ContractorUK.

“It’s going to separate highly skilled, highly paid contractors from straight temps because it’s going to take away the workers who should have never been going via PSCs/umbrellas in the first place.

“What we’re going to have is contractors via umbrellas or PSCs who will still be able to claim relief on travel and subsistence as long as they can show no SDC,” she said.

In line with her reading, Mr Osborne emphasised in his Budget speech that the “genuinely self-employed” will be protected from the proposed removal of tax relief on T&S costs.

Doing so won’t be easy though, warns employment status firm Qdos Consulting, which is disappointed that PSCs will be hit, albeit not until 2016 -- as predicted to ContractorUK.

The firm said: “These are contractors who are taking on the risks of running a business and therefore should be encouraged to make their businesses more profitable not stifle them.

“[Under the proposal] the aspect of ‘Control’ now takes on another level of importance to them in their efforts to prove that they are not subject to client control. This may lead to contractual clauses receiving greater attention.”

Kate Cottrell of IR35 specialists Bauer & Cottrell agrees. She said: “If this is adopted by the next government then the issue of IR35 just became all the more important. 

"This new policy will affect those in umbrella companies and those that are inside IR35, but PSC users that are outside the IR35 legislation can breathe a sigh of relief."    

But the issue is, says Qdos’ Seb Maley, there will be a scenario where a degree of control is exerted over a contractor but, by virtue of the other status tests, IR35 does not actually apply.

“However, they will not be able to claim associated travel costs [if this proposal is adopted from April 2016]," he said. "This needs to be addressed in the consultation period.”

And if it’s not addressed carefully by government, which contractor body IPSE is concerned it might not be, the restriction could be “very damaging” for contractors, the body warns.

A HMRC document seen by ContractorUK clarifies: "The current proposal will remove workers’ entitlement to claim tax relief for travel and subsistence for their home to place of work where:

  • the worker is supplied by an intermediary to a third party (an intermediary will include umbrella companies and personal service companies);
  • the worker is broadly subject to direction and control by that third party.

"So somebody who broadly looks like an employee will not be entitled to relief whereas someone who looks like a self-employed worker will continue to be entitled to relief. This approach aligns with that taken for agency workers in the Finance Act 2014."

The Revenue added that it would be consulting on the detail of the proposal over the summer. It will run with another consultation (by the business department) on "ways to ensure that workers who are provided to clients through an intermediary will have greater transparency on how they are employed and what they are being paid."

Editor's Note: Related Reading -

Contractor firms at odds about the Budget blocking expenses

Budget 2015: What contractors need to know

Budget's block on contractor expenses is fraught with unknowns

How contractor finances fared in Budget 2015

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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