The Autumn Statement announced on 25 November, and the publication of the draft Finance Bill 2016 on 9 December 2015, have provided us with a clearer picture of what changes that are likely to happen post 6th April 2016 and how this will affect Limited and Umbrella Contractors in relation to travel and subsistence expenses.
Whilst Brookson continue to develop the processes to address the upcoming legislative changes around tax relief on travel and subsistence expenses for contractors, there remains no additional news on the proposals to reform IR35 or how the tests used for travel and subsistence might be carried across to IR35 but believe that it is reasonable to assume that we may see changes in 2017.
So, what does the draft Finance Bill 2016 really mean for contractors?
Limited company contractors
The restrictions on the ability to claim tax relief on travel and subsistence costs will only impact Limited Company contractors if their assignment is captured by IR35. Therefore, the supervision, direction or control (“SDC”) test described below for Umbrella Company employees will not directly apply to limited company contractors. Whilst this is good news for the majority of limited company contractors, it is clear that HMRC are moving towards the SDC test as the preferred method, so it’s worth keeping an eye on how this develops in the event that is becomes part of the much anticipated IR35 reforms suggested by the 2015 discussion document.
In the meantime, it is important that you continue to consider the IR35 status of each contract you enter into from 6 April 2016, IR35 will determine whether you can claim tax relief on your travel and subsistence costs as well as whether you can benefit from the tax advantages of taking dividends from your company.
For limited company contractors whose accountant doesn’t offer an IR35 review service, it is highly recommended that you obtain a review from an IR35 specialist or consider switching to a specialist contractor accountant who offers IR35 reviews.
Umbrella company employees
Brookson have previously written about the restrictions on the ability to claim tax and national insurance relief for travel and subsistence costs and how this will significantly impact those contractors working via an umbrella company.
However it is worth noting that there are two elements to the changes coming into force on April 6th:
- The SDC test
- The salary sacrifice test
The supervision, direction or control (“SDC test”)
From 6th April 2016 umbrella company employees will no longer be eligible to claim tax and national insurance relief for their travel and subsistence costs if they are subject to the (or subject to the right of) supervision, direction or control (“SDC”) of anyone in the supply chain. Umbrella companies will therefore need to establish whether their employees are subject to SDC before they can reimburse tax free travel and subsistence expenses. Whilst there has been additional guidance from HMRC to enable us to understand the application of the SDC test across various industries, we will see different ways of assessing SDC across umbrella companies.
HMRC have recently confirmed that they view certain sectors of work as more likely to be subject to more SDC than others. For example, those in the education or healthcare sectors are at a higher risk of being subject to SDC. Whilst this is unlikely to surprise some, there is speculation around challenges being made to HMRC about these views, so it is worth keeping an eye on future HMRC updates to see if they change their views on this before April 2016.
HMRC have also provided a number of different scenarios to help contractors and umbrella companies understand what SDC looks like in practice. These scenarios are very helpful and stretch across a number of sectors, but as ever, they don’t cover every worker, or every type of assignment. Therefore, whilst umbrella companies will start to assess whether their employees are subject to SDC in the next few weeks, it may be useful for contractors to review these scenarios if they dispute the umbrella company’s decision on SDC. In terms of understanding how these tests will affect umbrella employees, I believe that this SDC assessment will ultimately capture (and therefore adversely impact) a large proportion of contractors currently working as employees of an umbrella company and only a minority will slip through the net. Even then, those few will need to deal with the second limb to these changes, the salary sacrifice test.
The salary sacrifice test
Getting over the SDC test hurdle isn’t the end of it for umbrella employees. Clauses found in the Finance Act 2015 also comes into force on 6th April this year which will mean that traditional umbrella companies paying some expenses as part of their weekly/monthly payroll will no longer be allowed as this will be viewed as a salary sacrifice arrangement.
As a result of this, I see umbrella companies changing the way they pay their employees. This is because anyone who passes the SDC test will only be able to claim the tax relief on their expenses at the end of the tax year via the submission of a claim for a refund of tax paid during the year under PAYE (probably a self-assessment tax return or similar process).
Brookson are currently finalising our SDC test and will launch a new service from 6 April 2016 to allow eligible employees to claim tax relief on their expenses. So contractors should keep their eyes peeled for more information from their umbrella provider over the next few weeks.
If you are a contractor concerned about how these changes might impact you and what options you have please contact Brookson for more information.