HMRC 'cock-up' forces umbrellas to test for IR35
A legislative gaffe by HMRC has put umbrella users in the unprecedented position of having to test for IR35, not ‘Supervision, Direction or Control,’ if they want tax-free reimbursement of ‘T&S’ expenses.
Admitting yesterday to have caused this “unintended consequence,” HMRC said that what Autumn Statement 2015 promised – curbs to tax relief for brolly users who are ‘SDC’ – was not actually legislated for on April 6th.
“Rather than consider whether a worker is under SDC, [the new legislation s339A will require umbrella companies] to consider whether the worker would be an employee if engaged directly by the client.”
HMRC added: “The test used in the current legislation [s339A] is different to what was announced at AS 2015…To resolve this, the legislation will be amended at the earliest opportunity.”
That earliest opportunity will likely be next year’s Finance Bill but the amendment may be backdated (to this year’s AS), said legal expert Roger Sinclair, reflecting on HMRC’s ‘embarrassing cock-up.’
“The issue, it seems, is that the bit of IR35 to which the new law refers, in defining the reference to IR35 which takes PSCs outside the SDC test, itself has an anti-avoidance provision.
“This provision has the effect of bringing umbrella workers within the scope of IR35,” he said. “The result is that until s339A is tweaked, the test for umbrella users [for T&S expenses' relief] is IR35, not SDC”.
Although HMRC says it regards such a test for umbrella users as too “burdensome”, and so will move to govern them by the “simpler” SDC test, many brollies may actually prefer it.
“Until the proposed further change is brought into force, more lines of defence are likely to be open to umbrellas, and it appears the debt transfer provisions associated with s339A(3) will not apply,” believes Mr Sinclair, a consultant at egos, a legal advisory to contractors and umbrella companies.
“Those lines of defence could increase to the point where HMRC may find it verging on the impossible to enforce s339A against umbrellas, as the department had envisaged, until the new legislation is further amended.”
So he sees potential for this “cock-up in connection with the new SDC legislation - which doubtless will cause HMRC much embarrassment”, to cost the exchequer actual revenue.
A spokesperson for HMRC said: "The government introduced legislation restricting relief on home-to-work Travel and Subsistence expenses for workers engaged through an employment intermediary in April 2016. The changes put those workers on the same terms as all others contracted directly, or through an agency contract.
"To ensure the legislation works as intended the legislation will be updated. It does not affect the vast majority of workers currently engaged through employment intermediaries."
Tax officials further played down any fallout from the legislative oversight in a note to affected parties. “Those who are working under SDC would, in the vast majority of cases, be considered an employee if engaged directly with the client.
“Therefore,” they said, “both tests should produce the same result and this change will have a minimal effect on the individuals concerned.”
Egos disagrees. “The SDC test and the IR35 tests are fundamentally different, and the SDC test is significantly more restrictive,” the advisory said.
“While we would agree that, in practice, it is hard to imagine a situation where a worker would pass SDC but fail IR35…we can certainly envisage workers failing SDC but nevertheless passing IR35.”
Both the legal advisory (in responding to questions from ContractorUK) and HMRC (in the briefing note it sent to affected parties) pointed out that the position of PSCs is unchanged, and was legislated for on April 6th.
“For individuals working through personal service companies (PSCs), relief would be restricted where the intermediaries legislation (IR35) applies,” HMRC confirmed. “Where a worker’s circumstances are such that they would be properly considered as self-employed if engaged directly, the new legislation will not apply.”