Important Changes to the Rules on Travel and Subsistence Expenses
With effect from 6 April 2016, contractors engaged by an employment intermediary will find it more difficult to claim tax and National Insurance relief on their travel and subsistence expenses.
With effect from 6 April 2016, contractors engaged by an employment intermediary, such as an umbrella company, recruitment business or personal service company (PSC) will find it more difficult to claim tax and National Insurance relief on their travel and subsistence expenses (T&S Relief) incurred on their ordinary home to work commute.
As many employment intermediaries currently rely on these tax and National Insurance savings to boost contractor pay rates and/or to reduce hirer charge rates, these changes will have a significant effect on the recruitment industry.
Background
Under the current rules, T&S Relief for home to work travel is normally only available for travel between a worker's home and a 'temporary workplace'.
There is normally no T&S Relief for home to work travel between the worker's home and a 'permanent workplace'.
Broadly speaking, a 'permanent workplace' is:
- a workplace which the worker attends, or is expected to attend, for a continuous period of more than 24 months, or
- a workplace which the worker attends for all or almost all of the time for which the worker is likely to hold, or continues to hold, the same employment
Under these rules, permanent employees and contractors supplied on an assignment based work contract cannot normally claim T&S Relief for their home to work travel.
However, these rules do allow some contractors who are engaged by an employment intermediary to claim T&S Relief for their home to work travel.
This is normally achieved by the employment intermediary setting the contractor up on an 'overarching contract of employment' under which the contractor is employed by the employment intermediary on a single set of terms and conditions and is then deployed to work at various client sites, each of which is classified as a 'temporary workplace'.
The government believes this system is unfair because it means a contractor doing the same job as a permanent employee can claim T&S Relief for their home to work travel whereas the permanent employee cannot.
The government has therefore decided to legislate to 'level the playing field'.
The New Rules
With effect from 6 April 2016, contractors who currently claim T&S Relief for their home to work travel to what are currently treated as 'temporary workplaces' will no longer be able to do so if they:
- supply personal services
- are engaged through an employment intermediary, such as an umbrella company, recruitment business or PSC, and
- the contractor is either:
- employed by the recruitment business or umbrella company and subject to, or to the right of, the supervision, direction or control of any person, or
- supplied via the PSC and the engagement falls within the intermediaries legislation (otherwise known as IR35)
There are liability transfer provisions which say that if the employment intermediary deliberately misapplies the rules to allow T&S Relief for home to work travel, then the employment intermediary and its director(s) will be liable for the unpaid tax and National Insurance.
Also, if another business (e.g. the hirer) provides the employment intermediary with a fraudulent document which misleads the employment intermediary into allowing T&S Relief for home to work travel, then the liability will transfer to the business which provided the fraudulent document and its director(s).
Consequences of the Changes
As a result of these changes, most contractors employed by recruitment businesses and umbrella companies will no longer be able to claim T&S Relief for their home to work travel.
For a recruitment business or umbrella company to allow a contractor to claim the reliefs, it would have to be certain that the contractor was not subject to, or to the right of, the supervision, direction or control of any person and it seems unlikely they would be willing to take such a bold stance especially as the definitions of supervision, direction and control are open to interpretation.
For contractors engaged via a PSC, they will need to take a closer look at whether they are inside or outside IR35 to decide whether they can continue to claim the reliefs.
This new legislation will have a significant impact on the recruitment industry, including:
- Many contractors will see their take home pay reduced with the inevitable awkward questions of who will pick up the cost. If the contractor is highly valued by the hirer, then the recruitment business and umbrella company may come under pressure to make up the contractor's lost pay.
- T&S Relief for home to work travel is one of the main reasons many contractors use umbrella companies. If they can no longer offer these incentives, many contractors may turn to alternative models such as setting up their own PSC (and recruitment businesses must be careful not to be seen to be 'arranging' or 'encouraging' contractors into PSC models otherwise they may fall foul of other tax legislation, such as the Managed Services Companies legislation).
- We may see an increase in non compliant payroll providers willing to take the risk of allowing T&S Relief for home to work travel to gain an advantage over their competitors with the intention of dissolving their business if HMRC come knocking.
Best practice
These changes will have a significant effect on all businesses supplying or receiving flexible labour.
Hirers, recruitment businesses and umbrella companies should be speaking to each other now to understand how these new rules will affect their supply chains and what steps they can take to minimise their impact.