Umbrella contractor expenses guide to Supervision, Direction or Control
With the extension of the new IR35 off-payroll working rules underway in the private sector, many contractors have shifted from operating via their own limited company to an umbrella company.
All eyes on umbrellas
It has meant that with so many higher paid, experienced, and well-informed contractors moving across to umbrella (generally not through their own choice), the workings of the umbrella and the rules around how they operate are facing increased scrutiny -- and challenge.
Pensions for umbrella employees is one important area that has been covered this week on ContractorUK but another key area that often needs demystifying is the murky world of Supervision, Direction or Control -- ‘SDC’ for short, writes Crawford Temple, CEO and founder of Professional Passport.
This legislation aimed at umbrella companies came into effect in April 2016 and, in simple terms, applies unless it can be shown that the way in which the worker personally provides the services is not subject to (or to the right of) ‘SDC,’ by any person.
SDC: The tough task of proving a negative
This is a key part to understand as it provides a strong hand to HMRC enforcement, because it applies unless the converse can be demonstrated It also provides HMRC with a much lower bar of evidence to win a case. As one HMRC enforcement officer reputedly put it: “I only need to find a crumb of evidence to win this case.’
Another key aspect of SDC is that the manner in which the worker personally provides the services does not need to be exercised in practice, it merely needs someone to have the right to do so for the legislation to apply. This element increases the complexity of achieving a robust assessment outcome.
Now those moving from PSC and familiar with the ‘old’ Chapter 8 IR35 rules will be fully aware that it was down to HMRC to prove they applied. This, along with many other reasons, resulted in protracted cases, a lack of clarity, and the courts having to ultimately decide.
Obviously HMRC had foreseen the move of PSC workers to umbrella companies in their planning for off-payroll, and clearly did not want similar situations to occur. Turning the burden of proof around, and the potential liabilities if HMRC successfully challenges, is what seems to be driving the different views and approaches across the umbrella sector.
How is the SDC assessment made and who holds the liability if it is wrong?
The assessment is made by the umbrella. The assessment can range from simply asking the worker to confirm a few questions, through to a detailed review with a confirmation of the inputs required by the end-client.
HMRC has its own views on what is required (according to its guidance):
‘To determine if this [SDC] applies, HMRC will consider the worker’s arrangement in the whole. The terms of the engagement and the way the work is actually done for the engager must be considered overall to determine if a right of supervision, direction, or control over the manner in which the worker provides their services is present.
‘Where there are procedures, methods, and instructions which must be followed, it is likely there will be supervision, direction, or control over the manner in which the services are provided. However, being required to comply with statutory requirements like health and safety procedures, is not determinative of a worker’s employment status, as all workers (employed or self-employed) must comply with these requirements.
‘Where a worker is engaged by or through an agency, there will be a presumption that there is (or there is the right of) supervision, direction, or control over the worker.’
The good news for the contractor is that where an incorrect assessment is made, any additional taxes due (typically those that relate to disallowed tax-free expenses) are the liability of the umbrella provider. Umbrellas will often have clauses that allow them to seek the recovery of these, where incorrect or inaccurate statements are knowingly provided.
Where there is a determination that a role is ‘inside IR35’ many will take a view that you are subject to SDC, even though the tests are different.
So what difference does an outside SDC assessment actually make?
For an umbrella worker, with the right employment contract in place, and assessed as outside SDC, it would mean that each workplace can be treated as a series of temporary workplaces. Where SDC applies, each engagement is treated as separate employment, resulting in there being a series of ‘permanent workplaces.’
Where there is a ‘temporary workplace,’ then allowable expenses can be claimed relating to this, which could include travel and subsistence.
So, if we assume no SDC, we then have to review the expenses rules which saw one change introduced in April 2016, along with the SDC requirement and a further amendment in April 2017. To cover these off in a comprehensive way would require much more than this article will allow. So, for simplicity’s sake, let us simply establish the central fact that the changes to the expense rules restrict the reimbursement of expenses from a worker’s ‘general earnings’, due to a condition known as ‘Relevant Salary Sacrifice’.
In the main, most providers who allow contractor claims restrict these to mileage only due to this condition. Some providers do offer arrangements that may allow a wider range of claims, but these come with health warnings contractors would be wise to read – and these probably need addressing in a separate article to explain fully.
Now, as if that wasn’t all complicated and bad enough, in April 2017 we saw the arrival of the Optional Remuneration Arrangements, or ‘OpRA’ for short. OpRA could place further restrictions on an umbrella company’s expenses policy as it would prevent the reimbursement of expenses tax-free where the worker is giving up a right to pay. This has been addressed by many umbrellas with pay being broken into two component parts:
- A salary (this is generally set at National Minimum Wage or National Living Wage)
- A discretionary bonus.
As contractors can guess, or know from direct experience, the discretionary bonus is key. Where the terms are correct and support the fact that the bonus is, in fact, discretionary then the worker is not giving up a right of pay, as where it is discretionary there can be no rights they are giving up. In these cases, OpRA would not apply.
So finally, what does all this mean for contractors?
Once again -- in simple terms, covering the majority of situations it means the following:
- If you are not subject to SDC, then your workplaces, subject to the correct contract terms, could be a series of ‘temporary workplaces.’ With them established as temporary workplaces, you could claim expenses -- although these expenses are likely to be limited to mileage only from the umbrella. Other allowable expenses can be claimed through your Self-Assessment Tax Return at year-end. But be aware -- you can only reclaim the tax relief and won’t get the National Insurance back. So, if you don’t drive to your workplace, you will see no benefit in most cases.
- If you are under ‘SDC,’ it is not all bad news. We see many workers who are under SDC who visit multiple workplaces as a standard part of their role. In these circumstances some, or all of the sites, could be considered as temporary and expenses allowed, in the same way as those not under SDC.