The issue around umbrella companies and expenses has long been a contentious one between HMRC and the contracting sector and it remains so to this day, particularly when it comes to travel and subsistence. In this article we will take a brief look at the changes to travel and subsistence expenses and how it is still possible to claim them whilst working for an umbrella company.
What changes have been made to travel and subsistence expenses?
HMRC have, in their wisdom, decided to restrict the ability of certain contractors to make claims for travel and subsistence expenses that are free of NIC’s and tax. This effectively means that all that commuting – by train, bus or tube – that is part of your contracting job and covered by expenses up until now, may well start to pinch on your finances a little bit more.
Ouch! Who Do These Changes to Travel and Subsistence Expenses Affect?
These changes will be relevant to all contractors who are personally performing (or who are under obligation to perform) their contracting services for another business or person through employment intermediaries. These could include:
- Umbrella Companies.
- Personal Service Companies (if they are within IR35.)
- Recruitment Agencies or Employment Agencies.
These new regulations, introduced via The Finance Bill 2016, are only applicable to contractors who are seen as being under the supervision, direction and / or control of their client. HMRC describes these contractors as being under SDC via the ‘manner’ that they are asked to do their contracting work. And that there is the rub – the contractors don’t need to actually be subject to any real supervision, direction or control. Bizarrely, they just need to be seen as being subject to supervision, direction and control. By making this change in distinction, HMRC are effectively massively widening the numbers of contractors who can get pulled into IR35.
Why Have They Made These Changes To Travel and Subsistence Expenses Then?
Up until the 2016 legislation umbrella contractors were given overarching contracts that enabled them to make a claim for the costs incurred with their home / work travel. This expenses relief was never offered to permanent workers employed by companies and was thus highlighted by HMRC and the Chancellor as being unfair (in both the 2014 Autumn Statement and the 2015 budget.) In that 2015 budget, the chancellor described the rule change as being for the purposes of placing contractors on a “level playing field” with their permanent working counterparts who were unable to claim such expenses.
And What Impact Will The Changes To Travel and Subsistence Expenses Have?
The biggest impact that will be seen from these changes is that there will be a significant reduction in the take home pay of affected contractors unless their clients are willing to do for them one of two things:
- Make increases to the rates being offered for their assignments or
- Help minimise their losses.
A decrease in contractors net rate of pay could also lead to them being less keen on travelling longer distances if they aren’t able to claim any relief on their travelling costs. For many contractors, commuting more than a short train or car ride could soon become something to be avoided.
What About Contractors At Temporary Sites?
Between the Social Security (Contributions) Regulations of 2001 and the Income Tax (Earnings and Pensions) Act of 2003, the law still says that workers can claim expenses when moving from home to a temporary workplace (provided they don’t breach the 24-month rules.) To take an example, imagine a contractor called George who works for an umbrella company and lives in Hastings. He has a contract in South London and commutes there every day. Based on the new travel and subsistence rules George will not be able to claim expenses on that daily commute from Hastings to London. However, if George was required to make a one-off journey to Birmingham for a one-off business meeting, he would be able to claim for that – because it is not his normal workplace.
What About Umbrella Company Contractors?
Umbrella company contract workers can, despite what most people think, still claim for travel and subsistence in a compliant way and without causing their umbrella companies any excess admin and paperwork issues. They can do so, as mentioned above, provided that no one has the right to supervise, direct or control them “in the manner which” they do their contracting work. And HMRC offers some guidance as to the definition of supervision, direction and control:
Supervision is where someone oversees someone else doing their work, in order to ensure that the worker is doing the work that they are required to do and to ensure that it is being done in the correct way to the correct standard.
Direction is where someone is making someone else do their contract work in a certain way and they do this by providing the worker with instructions, advice and guidance as to how they must do that work.
Control is where someone dictates what the work is that a person does and dictates to them how they are to go about doing that work. The concept of control also includes cases where one person has the power to move a contract worker from one job onto another.
As with most things it is the wording of the legislation that is crucial. HMRC’s reference to SDC being applied ‘as to the manner’ means that contractors can be seen as being subject to supervision to a degree, as long as they aren’t being given detailed instructions as to how they do their work.
And Finally, Why Umbrella Companies Hate The New Rules …
The combination of the highly subjective SDC tests provided by HMRC and the somewhat ambiguous guidance as to supervision direction and control has led to a lot of grumbling on the part of umbrella companies in recent months. The feeling is that these new compliance burdens are starting to mean that the processing of expenses will soon no longer be worthwhile. That’s because the umbrella companies are responsible for providing proof to HMRC that their contractors are not subject to SDC rather than the other way around. On the other hand, HMRC argue that they are not prescriptive in what evidence they will consider and say each case will be viewed based on its individual arrangements. This will leave the status of a contractor as indeterminate until HMRC have given a final ruling.