Are HMRC About to Tax Expenses?

Hector: hands off my Expenses

On 8th July 2015, the Treasury brought out a consultation paper entitled, Employment Intermediaries and Tax Relief for Travel and Subsistence

On the cover of the paper, the Government made its intentions crystal clear with the statement: “Proposals to remove home-to-work travel and subsistence tax relief where a worker is employed through an employment intermediary”.

By ‘employment intermediary’ they are including not just agencies, tax avoidance problems with which, was the Treasury’s main motivation for issuing the paper in the first place, but also so-called ‘umbrella companies’, as well as the normal personal service companies (PSC’s), through which may contractors operate.

As you can imagine, comments on the paper have flooded in, with the overwhelming opinion being that HMRC’s aim of achieving a ‘level playing field’ will not be achieved by these proposals. Most people in PCS’s potentially caught by these proposals understand that they are intended to apply to ‘umbrella companies’ and agencies who have been guilty of disguising wages as expenses to avoid tax and NI. This group are concerned that PSC’s are also being targeted, with one individual commenting: ‘My feeling is that PSCs are caught in the cross-fire of an anti-avoidance war with a minority of employment service companies who are abusing the current rules’.

The reason given for PSCs being included is that should the tax relief restrictions be applied only to ‘umbrella’ and ‘employment service’ companies, then those companies would automatically transfer their clients to PSCs to retain the tax relief. The main flaw to this argument is that HMRC do not appear to appreciate that there is no similarity between the companies being charged. HMRC are really saying that PSC’s are used for tax saving purposes only and are ignoring the fact that there are many other reasons for setting up a PSC. PSC’s trade in knowledge and skill set rather than goods, but they still have the same administration costs. The proposals ignore the fact that the new ‘dividend tax’ rules due to apply from 6 April 2016, will reduce the attractiveness of a PSC as a tax saving vehicle alone.

HMRC appear to believe that all PSC’s are all the same – i.e. all working for one main ‘end user’ for a protracted period of time, whereas in truth they often work for a number of contracts at the same time or one contract after the other. Contractors take on risks which permanent employees do not e.g. the financial risks of correcting mistakes, thus possibly needing to take out Professional Indemnity insurance, they have the worry about finding the next contract and not having the security of a job and the benefits that being an employee can bring.

The document states that the government are reviewing the whole area of travel and subsistence. People are concerned that by implementing the proposals in this document now rather than waiting ‘to review the whole’ is a ‘knee jerk reaction’ to the abuse of the current rules by a minority of employment ‘intermediaries’.

I am of the opinion that the root cause of the problem that the consultation document is trying to address is that ‘end users’ are the ones who are shifting their responsibilities and risk onto contractors, who often are not appreciative of the risks and not properly advised.

As one individual put it: “It’s funny that the worker always appears to be seen as the villain when it is the engaging company that is pulling the fast one – no Employers NICs, no auto-enrolment and no worries about employment law’. Most respondents believe that HMRC are targeting the wrong entities – it is the ‘client/ end user’ who is at fault and benefiting. Should these proposals be implemented this situation will remain but the PSC’s will be the loser.

The document states that ‘If HMRC identifies that the rules for travel and subsistence tax reliefs have not been applied compliantly’ – note the word ‘if’. How will HMRC be able to check that the rules are being complied with? Given the low number of compliance and investigations that have been undertaken to date under IR35 HMRC are obviously not finding it cost effective to undertake such investigations.

The biggest number of submissions has come from individuals in the IT profession, where PSC’s tend to be the norm. Their opinion is clearly that the proposed objectives cannot achieve the policy objectives. The main objective is ‘to ensure a level playing field for all workers and businesses paying tax and National Insurance Contributions’ – attacking PSC’s rather than the ‘engager’ means that the ‘engager’ remains the winner – see ‘Root cause of the problem’.

One of the key criteria outlined in the paper was that the PSC or umbrella company should not be under the direct ‘supervision, direction and control’ of the end-user or ‘engager’ company. However the papers suggestions were extremely restrictive and will mean that in many situations it will be uneconomic for the contractors to work on contracts located some distance from their main base/home. The cancellation of the travel etc tax relief and likely Insurance premium rises, plus the new ‘dividend rules’ will make the PSC uneconomic in many cases thus forcing the contractor to become self-employed with the added insecurity that could entail. The rules will not force the ‘engager’ to take the contractor on as employed as HMRC believes so once again the ‘engager’ would be the winner.

I would also make the point that the term ‘supervision, direction and control’, has been directly lifted from the IR35 rules, which have been pretty much entirely abandoned as being nearly impossible to use.

1. It strikes me that the simplest solution would be to leave small companies and dividends alone and just impose an equivalent of employers NICs on the ‘engager’ by making them pay the tax and NI they would have paid (or at a higher rate) if they’d taken on an employee.
2. If HMRC made it difficult and less tax efficient for the ‘engager’ then they might reduce or stop using so many contractors and hire employees instead, which is the real mischief that needs to be addressed.
3. It seems to me that the new ‘dividend tax’ goes most of the way to align PSC taxation to be similar to self-employed tax and Class 4 NIC. So the only “tax gap” left to address is the lost Employers NIC, which is a stealth tax on employment and probably gave rise to the emergence of umbrella companies and PSC’s in the first place.

If any of you would like more detailed information on any aspect of UK Tax Returns, send me an e-mail and I’ll be pleased to advise further.

Share
Tweet