Budget's block on contractor expenses is fraught with unknowns
Last week’s Budget brandished an IR35-style framework which focuses on the ‘working practice’ of supervision, direction and control to rein in the ability of both umbrella and limited company workers to claim tax relief on travel and subsistence expenses.
It’s a twist the contractor market didn’t expect, writes Marc Scott, a director of Liberty Bishop.
The gulf between what’s proposed and what was proposed
Under the proposal (which is due to be fleshed out in consultation later this year and implemented in April 2016), any worker that is under Supervision, Direction and Control (SDC) of the hirer will have no entitlement to tax relief on travel and subsistence, irrespective of whether they are engaged via an umbrella company or via their own limited company.
This emphasis on 'working practices' as the determinant for whether travel and subsistence relief can be gained appears to be somewhat disconnected from the government’s original proposal that they would examine travel and subsistence relief in the context of (the supposed abuse of) overarching contracts of employment.
Not only is that an interesting shift in and of itself, but it’s also one which raises the scenario whereby workers engaged via the same type of intermediary will be subjected to different tax rules. This sort of thing already exists among PSC workers with regards to their IR35 status and their subsequent entitlement to dividend payments, of course, but the concept of differential tax treatment for employees within the umbrella model is new territory. And, somewhat confusingly, this new set of criteria implies that some umbrella company employees will be seen as ‘self-employed’ due to them lacking SDC, whereas other umbrella company employees will simply be seen as employed due to them being subject to SDC.
Osborne claims that these new rules will be used to clampdown on the agencies and umbrella companies who are abusing tax reliefs on travel and subsistence, while simultaneously protecting the ability to gain relief for those who are “genuinely self-employed.”
At this stage, however, it is unclear as to how any umbrella company employee, working under a contract of employment, could ever be seen as genuinely self-employed and therefore entitled to relief. And if we are to assume that the rules will be structured in such a way that an umbrella company employee can be seen as genuinely self-employed, what implications does this have for the wider employer/employee relationship? Are genuinely self-employed umbrella employees entitled to less employment rights that employed umbrella employees, for example?
Why PSCs might (wrongly) be all the rage, much to the taxman’s impoverishment
At a more practical level, a major concern regarding the new criteria for determining relief entitlement is that it could be used as a benchmark for gauging IR35. Umbrella company employees that are granted relief entitlement on the basis that they are a self-employed-type worker may feel that they’ve been given the green-light with regards to IR35. In that situation, many of those workers may decide to switch to being a PSC in order to continue to gain travel and subsistence relief but to also benefit from dividend payments. The overall effect in that situation, of course, is a net loss of tax revenue for the government.
Conversely, those umbrella contractors that are denied travel and subsistence relief will see a drop in their net retention. Hirers and agencies are unlikely to be able to plug the gap by increasing gross pay rates, so the disgruntled umbrella employee may look to switch to a PSC in order to recoup these losses via dividend payments and off-setting expenses.
Of course, in this situation the worker is still under supervision, direction and control, and is therefore not supposed to be gaining travel and subsistence relief and (very likely) not supposed to be receiving dividends. But the point is that by the worker having switched to a PSC where they now make all the decisions, they are freed-up to abuse the rules in a way that they never were as an umbrella company employee!
In short, these new proposals could have the impact of driving workers at both ends of the spectrum away from the umbrella model towards operating their own PSCs, resulting in lost tax revenue for the government throughout. For this reason and others, we’ll be playing an active role in the upcoming consultation process and will be voicing our concerns.
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