The government’s 12 week consultation into ‘Employment Intermediaries and Tax Relief for Travel and Subsistence’ is nearly at an end. The consultation, which runs from 8th July to 30th September 2015, outlines proposals to tackle tax avoidance in the sector by removing home-to-work travel and subsistence tax relief for workers who are employed through Umbrella Companies or Personal Service Companies (PSCs), and are working under the supervision, direction or control of any person.
Currently, those employed through an intermediary are able to access tax relief on their home-to-work travel and subsistence expenses, whilst those employed permanently, directly by the end employer are not. Because of this ‘unfair’ benefit, and with an increase in the use of employment intermediaries in recent years, the Budget 2015 saw the government announce that they will be putting a stop to employment intermediaries exploiting the tax system and will be levelling the playing field for all employees. Following the announcement HMRC began their consultation, outlining their proposals to make the tax system fairer. Consequently, they have proposed to remove tax relief for home-to-work travel and subsistence expenses for workers who are: * supplying personal services * engaged through an employment intermediary (umbrella company or PSC) * subject to the supervision, direction or control of any person. Furthermore, in order to ensure the above is enforced, HMRC have proposed: ‘Transfer of Liability’. This will mean that the end employer will be responsible for applying the appropriate tax relief and will be liable for any discrepancies in tax paid.
So, if these changes are to be implemented, what will the effect be on you?
Evidently, temporary workers employed through employment intermediaries and working under the supervision, direction or control of any person, will no longer receive travel and subsistence expenses, reducing their take home pay.
However, if temporary workers do comply with the supervision, direction or control test, they will be able to claim tax relief on travel and subsistence. Although, the new process will mean that relief will have to be claimed at the end of the financial year, directly from HMRC. Consequently, their take home pay will still be less in the short term and the process to claim more difficult. We recommend workers review their options, pre April 2016, to see what working arrangement is best for them.
Employers will not be directly affected by these proposed changes as they are not responsible for paying workers hired through an employment intermediary. However, with employment intermediaries being subject to increased levels of tax and NICs, due to them being unable to subsidise pay through travel and subsistence expenses, they may see an increase in the rates they pay for temporary workers.
Furthermore, if the ‘Transfer of Liability’ does come into action then employers will need to review their current set-up, and decide if employing workers through umbrella companies is still effective and worth the extra administration burden it may bring.
With umbrella employees no longer able to receive NI relief on their expenses and having to wait a period of time before they can claim any tax relief, it is expected that the changes will significantly reduce the viability of umbrella companies. It will no longer be tax advantageous to use or indeed work for an umbrella company.
Personal Service Companies
Similarly to umbrella employees, individuals working through a PSC who are under the supervision, direction or control of any person will not be eligible for travel and subsistence tax relief. Furthermore, with HMRC looking to reform IR35 to tackle ‘employment tax’ avoidance, all PSCs need to consider the impact these changes will have on their business. To read more about the IR35 changes read our blog, ‘IR35 Reform up for Discussion’.
With the strong possibility that umbrella companies will become obsolete, it is advised that recruitment agencies begin considering how this may affect them. The main concern is for agencies that receive referral fees from umbrella companies. It is highly likely that this revenue stream is going to be stopped; therefore it is important agencies are aware of how these changes will impact their business and take steps to mitigate the change as soon as possible. Furthermore, for agencies that work for a large number of umbrella employees it is recommended they consider how they can support their workers when the changes are implemented. Ideally, agencies need to keep these workers up-to-date with the potential changes, letting them know how it will affect them and what their options are. There is a lot for recruitment agencies to think about as they have a responsibility to their workers and their clients, and need to make the transition to the new changes as seamless as possible for all.
HMRC’s discussion document on the above changes is open until 30 September 2015. The outcome of which will be announced at the Finance Bill 2016 with changes coming into force on 6 April 2016.