The government is currently reviewing the tax rules followed by employment intermediaries for travel and subsistence expenses, with the aim of modernising these rules to reflect contemporary practices in the labour market. The government’s latest proposal could mean that individuals who work through their own personal service companies (PSC) could lose the ability to claim a tax deduction for the cost of travel to their clients’ premises. These changes have been brought about due to employment agencies and umbrella companies abusing the current tax rules for claiming tax relief on travel to temporary workplaces. As a result of the current rules agencies have benefited whilst the individuals claiming have either seen no benefit or, in some instances, have been worse off.
So, how does this work?
Currently, overarching contracts of employment are used by employment agencies and umbrella companies to place temporary workers on multiple work placements. In all instances the employment agency and umbrella companies acts as the permanent workplace for the worker and each work placement is treated as being held at a temporary workplace (so long as the individual is not there for more than 24 months). Therefore, the worker is able to claim travel expenses to their temporary workplace as well as associated subsistence costs. However, whilst this may seem extremely advantageous to the employee this is not always the case. Some employment intermediaries using overarching contracts of employment take advantage of the tax relief through reimbursing travel and subsistence expenses in return for a reduction in salary, rather than reimbursing the expenses on top of the individual’s salary. This effectively swaps pay that would have been subject to tax and employee NICs relief for reimbursed expenses that are not. This also reduces the employment intermediary’s employer NICs liability at no extra cost.
What is going to change?
The government is undertaking a wider review of all the tax rules for travel and subsistence expenses, which may take several years to complete. However, in the meantime, the government has proposed the two following solutions to prevent the current abuse of the tax rules:
- to stipulate that where an individual is supplied through a third party, including a PSC, the workplace of the end client is considered a “permanent workplace” in all cases
- to stop treating overarching contracts of employment as giving rise to a series of temporary ‘employments’ under a permanent contract for tax purposes
This first solution means that contractors working through a PSC will no longer be able to claim travel expenses from their home-office to their client’s premises. This will mean that contractors may no longer wish to undertake contracts far from their home, as they will not be reimbursed with travel costs and the associated subsistence (accommodation and food). The government realises that this change would have a significant impact on skilled workers that operate through PSCs. It also recognises that excluding PSCs from option one would encourage employment agencies to force workers to operate through PSCs. To discuss the proposed changes the government has released a full consultation document that is open for comments until 10 February 2015. The document can be viewed here – Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses. The government’s decision will be announced in the Budget in March 2015, with changes expected to come into effect in 2016.