Let’s cut to the chase. If you are a contractor, this will affect you if you have been previously able to claim tax relief on your journey to and from work and for any associated subsistence. Now, you almost certainly will not be able to do so…
This new legislation, introduced in the Chancellor’s Autumn Statement in November2015, was based on the previous (coalition) Government’s plans to clampdown on what they perceived was a misuse of travel and subsistence rules. Because permanent employees are not able to get tax relief for ‘work to home’ travel expenses, it was felt that it was unfair for any intermediary firm (an ‘Umbrella company’, ‘PSC’ [Personal Service Company] or Limited company, employing anyone working as a contractor) to be able to provide this benefit to contracted employees. The self-employed, who are considered to be taking on the risks of self-employment, are entitled to make such claims. The government feels it is important that contractors, who do not carry the same risks, do not benefit in the same way as the self-employed.
The latest (March 2016) budget has clarified matters. As the gov.uk website puts it with admirable (if unusual – see below!) clarity, “this legislation will prevent workers, engaged through an employment intermediary, and their employers, from benefiting from relief for home to work travel expenses.”
Now, it’s clear that this benefit is going, and with almost immediate effect - from April 2016 - for most such contracted employees. However, in the interests of fairness, some workers may not be affected, specifically those who work outwith the scope of IR35 or who can prove that the new rules don’t apply to them. As always with HMRC/HM Treasury, proving that any new legislation does not apply to you is pretty difficult. IR35 itself exists so that government can differentiate between self-employed individuals and all other contractors who do not meet HMRC's definition of 'self employment'. If you are working under IR35 then you are, by definition, a contractor and subject to these new changes.
In other words, for the majority of IR35 contractors working for an intermediary such as an ‘Umbrella’, PSC or limited company, tax relief for travel expenses between work and home and associated subsistence will no longer be available. This is based on the fact that most such workers are subject to ‘SDC’ (Supervision, Direction or Control). The vast majority of contractors are, of course, given some form of supervision, instruction, direction or controlled in some way or another. This ‘SDC’ helps the government define those who are contractors (as opposed to the self-employed) and identifies them as not being able to receive this tax relief. If you genuinely were your own boss in such a contracted role, then the chances are that you would be genuinely self-employed – and not liable for the benefit anyway.
Even if you are able to pass the SDC test, you still have another hurdle to cross. The 2015 Finance Act includes provision (under Chapter 7a S289a (Salary Sacrifice)) to delay payment of travel and subsistence tax relief as claims will have to be made through the self-assessment system. This legislation will cause intermediary companies to change the method of calculating employees’ pay and the timing of when relief is claimed, although most commentators think it is unlikely to change the employment model. What it will do, however, is make contracting less attractive due to the increased bureaucracy involved. That said, it is expected that compliant umbrella companies will be prepared to take on the additional work involved.
The message has to be to make sure you are getting it right. If you are in any doubt, check with your recruitment agency/umbrella/intermediary company and, ideally, a tax expert/accountant. To illustrate why you should do this, have a look at this tiny snippet, only one from dozens of pages of the relevant legislation:
- An employment is not “direct employment” for the purposes of subsection (1)(a) if—
- (a) it is an employment which is treated as existing under—
(i) section 56(2) (deemed employment of worker by intermediary), or
(ii) section 61G(2) (deemed employment of worker by managed service
(b) an amount counts as employment income in respect of it by virtue of section
554Z2(1) (treatment of relevant step under Part 7A (employment income
provided through third parties)).
Clear now? You need a specialist to understand this sort of stuff. It’s not worth the grief that will come if HMRC get on your case if they think you are at it in any way, shape or form!
With thanks to Gareth Biggerstaff, MD, Be-IT Resourcing
Stewart McKinnon, Director