HMRC hands contractors IR35 scenarios on ‘SDC’

Three fictitious workers have been deployed by the taxman to help personal service company contractors gauge how IR35 interacts with his new rules on Travel & Subsistence.

‘Jeanette,’ ‘Dean’ and ‘Asif’ feature as case studies in HMRC’s guidance on the rules, which the Revenue updated after admitting that an error in the rules requires them to be rewritten.

Reproduced below, the examples show when IR35 applies (so T&S relief is denied); when IR35 would apply but for remuneration being taken as salary and when IR35 does not apply.

It is not the first time that personalised work scenarios have been published to help PSCs assess their status. Introducing IR35 in 2000, HMRC unveiled ‘Gordon,’ ‘Henry’ and ‘Charlotte.’

Although the trio were accused of being too simplistic, HMRC stuck with them until 2012 when it replaced them with ‘Emma,’ ‘Juanita,’ ‘Hamish,’ ‘Barbara,’ ‘Costas’ and ‘Praveen.’

These case studies received flak too, albeit mainly as part of a wider criticism of HMRC’s Business Entity Tests which they were created with. These six ‘IR35 Scenarios’ were axed as well, in 2014, as were the Tests. 

But next to today’s line-up (Jeanette, Dean, Asif) HMRC has also produced depot worker ‘Martin,’ travelling engineer ‘Dave,’ IT consultant ‘Peter’ and agency worker ‘Bronwyn.’

Reproduced below (as Examples 4,5,6 & 7) from HMRC’s guidance on the T&S legislation, this quartet is in addition to both ‘Jim’ – introduced with ‘Paula’ in 2015 – and ‘Paul’ and ‘George,’ below too (as Example 8).

Example 1 – (Jeannette) IR35 applies

Jeannette works via her PSC, JB Ltd on a 6 month contract providing interior design services to a luxury hotel chain where she works under the direction of the Head of Procurement.

She’s provided with office space at their largest hotel and goes there every day. She always buys lunch in the hotel restaurant. When she travels to the hotel, she is reimbursed for her travel expenses and for the cost of her lunch as a subsistence expense. The intermediaries legislation IR35 applies to the engagement.

The employment intermediaries travel expense provisions apply to Jeannette’s travel and subsistence expense payments because the basic conditions are met and JB Ltd is subject to IR35. She isn’t entitled to tax or NICs relief on her travel expenses. Whether or not Jeannette is subject to SDC doesn’t need to be considered.

Example 2 – (Dean) IR35 would apply but for remuneration being taken as salary

Dean is an IT Consultant who works as a contractor via his own PSC, DG Ltd. He’s the only director and shareholder. He’s providing his personal services through DG Ltd to a trucking company, T Ltd. Dean works as part of a team under the supervision of T Ltd’s IT director.

Dean is required to travel to T Ltd’s main depot at least 3 times a week and when he does is reimbursed his travel expenses to and from home. He takes all the income of the engagement from DG Ltd as his salary. DG Ltd needs to consider IR35.

It would be subject to IR35 legislation and would need to make a deemed employment payment if Dean did not take all its income from the engagement as his employment income. As such, and because the basic conditions ESM5530 also apply, his travel expenses are subject to the employment intermediaries travel expense provisions. There’s no tax or NICs relief on his travel expenses for any of these journeys. Whether Dean is subject to SDC does not need to be considered.

Example 3 – (Asif) IR35 considered but doesn’t apply

Asif works via his own PSC as a draughtsman. In the last year his personal services have been supplied to several multinational companies to work on large engineering projects. Asif takes some of his PSC’s earnings as salary and some as dividends.

Asif’s PSC needs to consider IR35 but the circumstances are such that it isn’t subject to IR35 legislation for any of its contracts. Even though the basic conditions are met, the employment intermediaries travel expense provisions don’t apply because Asif’s PSC is not subject to IR35. This is regardless of whether or not Asif takes some or all of the remuneration his PSC earns from the provision of his services as salary. Whether Asif is under SDC doesn’t need to be considered.

Example 4 – (Martin) Depot workers

Martin is employed as a lorry driver through an employment intermediary and would be regarded as an employee if engaged directly by the client. He picks up his lorry from a depot each morning, where he also receives instructions about his delivery locations for the day. His attendance at that depot at the start and finish of each shift may be brief.

However no relief is available for the cost of travel between his home and the depot. The depot is the base from which the duties of his employment are performed and is a permanent workplace. He’s likely to be able to claim relief on his travel to make deliveries, as this would normally be considered travelling in the performance of his duties.

Example 5 – (Dave) Travelling appointments

Dave is a service engineer who’s engaged through an employment intermediary, working for a utility company and would be an employee of the utility company if engaged directly. He moves from place to place during the day carrying out repairs to domestic boilers. He receives details of the locations he needs to attend in a day whilst at home, or whilst travelling.

Dave’s work is itinerant; he holds a travelling appointment and is travelling in the performance of his duties. He is able to claim relief on all of his business travelling expenses.

Example 6 – (Peter) when the employment intermediary is an MSC - all conditions in section 61B(1) ITEPA are satisfied

Peter works as an IT consultant under arrangements with AB Recruiters (the MSC provider) who manage the provision of his services via his own service company and the associated accounting functions. The MSC legislation applies.

When determining whether the employment intermediaries travel expense provisions apply the basic conditions ESM5530 must be considered and the provisions relating to SDC ESM5560.

Example 7 – (Bronwyn) when the employment intermediary would be an MSC - section 61B(1)(c) not satisfied

An agency recently arranged for Bronwyn to set up a service company through an MSC provider. Her services are personally provided to NHS Trusts, the agency pays her PSC amounts for her services and she withdraws a salary subject to PAYE (Pay As You Earn) Income Tax and Class 1 NICs. The agency makes all the arrangements with the clients but the MSC provider deals with all accounting invoices and company returns. Bronwyn is under the control of the client in how she goes about the work.

Section 61B(1)(c) is not satisfied because the payments are made in a way which results in Bronwyn receiving payments of an amount (net of tax and Class 1 NICs) equal to that which would be received (net of tax and NICs) if every payment in respect of the services were her employment income. Bronwyn’s company would be an MSC within the meaning of section 61B(1) but disregarding subsection 61B(1)(c). Therefore, when determining whether the employment intermediaries travel expense provisions apply, the basic conditions must be considered ESM5530 and the provisions relating to SDC ESM5560. As Bronwyn is controlled in how she does her work, the employment intermediaries travel expense rules will apply.

Example 8 – (Paul & George) Excluded services

For the employment intermediaries travel expense provisions to apply, 2 basic conditions ESM5530 must both be met. The first of the basic conditions is that an individual ‘the worker’ ‘personally provides services (which are not excluded services) to another person (the client)’ (section 339A (1)(a) ITEPA).

This basic condition of personally providing services isn’t met if the worker’s services are provided wholly in the client’s own home:

Paul works away from home during the week only returning at weekends. As he is away so much he decides to get help with his domestic chores. During the summer he engages a gardener, George.

George works via his own PSC which is subject to IR35. Despite this George isn’t covered by the new legislation as he’s providing his services in Paul’s own home.

Editor's Note: For a fuller understanding, see the examples in the context provided by HMRC in its formal guidance on the T&S legislation.

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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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