In the Autumn Statement, the chancellor promised to crack down on an abuse of the rules for travel and subsistence expenses. The abuse is prevalent in the temporary labour market, but the changes will affect a wider range of service providers. Last month, HMRC published a consultation paper on this topic. Mixed views have been expressed by those most affected, namely consultants and those who engage them. We review this and the series of measures (some recent, others less so) designed to bring those engaged in providing their own services into the PAYE fold, or at least to restrict the advantages of falling outside of PAYE.
“No one wants to be within PAYE these days” declaimed one of my clients last month. And he was right. PAYE of course applies where remuneration is paid to an employee. For employers, falling within PAYE entails the compliance headaches and related professional expense of applying it, together with the colossal cost of Employers National Insurance Contributions (NIC), which is a direct tax on employers, now running at 13.8%. Added to that, there is package of rights (such as pensions, sick pay and holiday pay) which an employment relationship entails, and which create corresponding obligations and risks for an employer. From the service provider’s perspective, being paid through PAYE means deduction for (almost all) business expenses are denied, and a higher NIC bill.
Hence there have been many attempts to bring service engagements outside of PAYE, and corresponding Revenue measures to counteract this. Years ago, the Construction Industry Scheme (known as the ‘lump’ within the industry) was enacted. This compels those subcontracting building work to withhold tax from payments made to subcontractors (much like PAYE does for employers), with the rate of deduction depending on the subcontractor’s compliance with registration requirements.
The IR35 legislation is now in its 15th year. It was prompted by the spate of employees who would resign, and then provide their services through the medium of a service company (which they would both work for and own) to their clients (who had previously been their employers). In such circumstances, what is now known as the ‘personal service company’ legislation has the effect of deeming the fees received by the service company from the client to be employment income, and taxes the fees accordingly, regardless of whether the employee actually receives the fees, simply leaves them in the company, or the company pays them out as a dividend ( dividends unlike payment of salary, do not attract NICs). Ironically, many employers now prefer contractors to provide their services through a service company, because it shifts the risk and compliance burden from them as clients to the service provider and his company.
More recently, in April 2014, HMRC introduced the ‘false self employment’ rules (formally known as the onshore employment intermediaries legislation). Instead of targeting service companies, these rules target employment intermediaries- essentially agencies and so called ‘umbrella’ companies – which provide the services of ostensibly self-employed workers to clients. Under the legislation, such workers are subject to income tax and NICs via PAYE. These liabilities will fall to the agency to account for. It won’t affect agency workers who are already subject to PAYE, nor will it affect those providing their services under the personal service company arrangement described above. However, it will affect agencies and other intermediaries supplying the services of self-employed workers: unless the intermediary can prove that there is no supervision, direction and control by the client over the worker, PAYE and NICs apply.
The latest change is the consultation published last month on travelling expenses. This is targeted at agencies or ‘umbrella contract providers’ who already apply PAYE. Such entities often do this through the use of what are known as ‘overarching contracts of employment’ (OACs). These contracts are used to place workers on multiple projects at the same time – but under the terms and conditions of one single contract of employment. Presently, employees cannot get tax relief for the cost of travel between their home and workplace unless the travel is to a temporary workplace (meaning one of less than 24 months’ duration), and only then where the employee is unaware whether they will be working at the temporary workplace for the entire duration of their employment. However, where someone is engaged at multiple workplaces under an OAC, they may be eligible for this relief (because they will have multiple engagements often on multiple sites). The abuse being targeted lies in some employment agencies and umbrella companies reimbursing travel and subsistence expenses in return for a deduction in salary, rather than reimbursing the expenses on top of the employee’s wages or salary. This has the effect of reducing the amount of pay that would otherwise have been subject to tax and employees NICs, and also reduces the agency’s employer NICs liability, because the employee’s pay has been reduced.
The consultation recommends two options, both of which will end travel expenses and subsistence relief where an OAC is used. Not surprisingly, this has been welcomed by some, given the obvious avoidance and the potential tax at stake, but there also many contractors for whom involving a third party such as an agency together with an OAC allows a reduction in their personal administrative burden, including the administration of tax and NICs liabilities. Whether they will continue to enjoy tax relief for travel and subsistence expenses will depend on the outcome of the consultation, but whatever the outcome, the history of this sort of legislation suggest this is unlikely to be the last battle fought in this area.
Please note that this summary is not intended to be exhaustive and should not be taken as legal advice on any of the subjects covered.
