What HMRC's new SDC guidance really means
For his latest expectation-defying move, the taxman has unveiled guidance on 'Supervision, Direction or Control' at what is already a busy time for contractors due to many changes this week to how they operate, writes Duncan Strike, a director of Intouch Accounting.
Contractors using an umbrella company will almost certainly want to read the new guidance, which not everyone expected and which follows HMRC’s examples of ‘SDC’, as it outlines the circumstances where their Travel and Subsistence (T&S) expenses will be taken away.
This was always going to be a financial hammer blow for umbrella contractors, ever since the SDC test was unveiled at Budget 2015. But what’s potentially worse is that the guidance puts paid to the popular idea of having a get-out clause.
The 10-part guidance document says: “HMRC don’t consider signed waivers and generic statements that the manner in which the worker personally provides the services is not subject to (or the right of) SDC as satisfactory evidence.”
Furthermore, and for once in line with expectations on the T&S legislation (specifically, the 'debt transfer' provision), the Revenue says that if it “considers that the evidence produced to show that the SDC test isn’t met is unsatisfactory,” it will “recover PAYE income tax and Class 1 NICs due from the employment intermediary or appropriate person responsible.”
In short, both these extracts from the guidance mean that despite hopes that umbrella workers’ self-certification of their working practices would be enough; it won’t be. What it does mean is that the onus will be on multiple parties to contribute to assessing whether a worker is subject to SDC – and only one of these (S, D or C) needs to be met.
So proper evaluation will need to be carried out by all those involved in the supply chain, including client; agency, umbrella company and the worker. To us, it seems unlikely that all of these links are going to want to put themselves in the firing line to get the right answers (or risk getting it wrong and picking up the bill) so umbrella workers will, ultimately it seems, lose T&S expenses.
Elsewhere in the guidance, HMRC confirms that the words - ‘Supervision’ - ‘Direction’ - ‘Control’ - are to take their normal meaning and reliance cannot be placed on past legal and tribunal decisions on what ‘Control’ means. The tests are also considered in isolation, meaning that a right of anyone to Supervise, Direct or Control is required to lose T&S expenses.
The HMRC guidance also suggests that anyone who is bound by professional standards (whereby they must ensure expected standards are met) will be particularly exposed by this ruling. So teachers, care workers and medical contractors are likely to lose relief on their T&S costs if contracting through an umbrella. But it’s not just these three respected occupational types of contractor who can now be hit. In fact, ‘SDC’ (which came into force on Wednesday April 6th) will impact every umbrella worker who incurs expenses for travel and subsistence in undertaking their work.
For PSC contractors, the picture is brighter but less clear-cut. The SDC test does not apply to personal service companies (PSCs) genuinely in business on their own account, but PSCs with assignments that fall within IR35 will lose T&S expenses. It’s worth noting -- the IR35 test is more complex than SDC and most importantly is potentially easier to pass than a simple SDC test in isolation. Indeed, under IR35 there are many aspects to the tests considered, including an evaluation of how the balance tips. Where those tests are not met, IR35 does not apply and T&S is available.
By contrast, if you contract using an umbrella, and you continue to self-certify: you’re in trouble. And if your umbrella encourages you to self-certify: they are wrong to do so. We recommend instead that all umbrella workers should consider conducting an IR35-style test, and where they fall outside IR35, they can carefully consider incorporating a business, assuming of course that they want to save their T&S expenses.