The 2015 Finance Bill which became law at the end of March 2015 includes new rules which determine the availability of tax relief for reimbursed expenses paid to employees. The legislation is designed to target “travel and subsistence schemes” used by some employers to reduce taxable pay and replace it with tax and NI free reimbursed expenses, known as salary sacrifice schemes. Our interpretation of these new rules is that from 6 April 2016 umbrella companies will be unable to offer tax and NI free reimbursement of travel costs to their employees.
Under current arrangements, from 6 April 2016, NI relief will no longer be available. However, tax relief may still be available but will need to be claimed by the employee via their self-assessment tax return. This means that a cash flow issue will arise for the employee as tax relief will no longer be available at source. Once we have been able to work through the detail and consult with HMRC we will offer our existing umbrella employees a solution to these issues.
We expect that this rule change may result in changes to the way in which umbrella companies pay their employees. However, as with all new legislation it is hard to determine exactly what HMRC are intending to achieve by the new legislation and how they view compliance. As HMRC did not consult with anyone on these legislation changes we are hoping that they will provide some guidance and advice to the umbrella market and we are looking to engage with HMRC directly to discuss this issue. Once we know more information we will provide further analysis.
It is also worth noting an additional change which will come into force from 6 April 2016 is the removal of the expense dispensation regime, with umbrella companies who hold dispensations to pay enhanced scale rate expenses (over and above HMRC’s standard benchmark scale rates) likely to have these revoked.
Potential for additional changes
The recent Budget announced that HMRC will consult over the summer on potential changes to the availability of tax relief for reimbursement of travel and subsistence expenses for umbrella company employees and directors of personal service companies. This follows a “discussion document” published in December 2014. It appears that HMRC have listened to feedback from the collaborative response from the sector on this discussion document to try to ensure this change doesn’t impact genuine contractors.
The consultation will explore the removal of tax relief on reimbursement of travel and subsistence expenses only where the umbrella employee or limited company contractor is under the supervision, direction or control of the end client. If this change goes through as expected it will result in genuine, professional contractors, continuing to operate as normal and those lower paid / lower skilled contractors (who may not hold the necessary skills or experience to deliver their services without the need for the end client to manage how they do their work) having their tax relief restricted to bring them in line with the tax treatment applied to the end client’s permanent work force.
Given that this change has been driven by HMRC wanting to ensure “Fairness” in tax treatment between employees and “disguised employees”, determining whether a contractor qualifies for tax relief on travel and subsistence expenses based on whether they are controlled by the end client seems a reasonable solution. It will however result in the some lower paid, lower skilled temporary workers who have become accustomed to enjoying the benefits of tax relief on their travel and subsistence costs suffering a reduction in take home pay.
Brookson are a founding member of the FCSA, a trade body representing service providers to the UK’s flexible workforce. The FCSA are currently lobbying the Government to try to influence the outcome of this consultation and are looking for contractors to assist them with this. If you are an umbrella company employee or a limited company contractor and are concerned about this proposed change the general election gives you an opportunity to influence the political agenda by writing to the candidates in your constituency.
It will be interesting to see how the temporary labour market reacts to these changes, in particular the potential for further proliferation of non-complaint models to help eliminate this increased cost in the supply chain.
Finally on the potential changes to tax and NI relief for travel and subsistence costs incurred by contractors, Brookson’s Commercial Director Andrew Fahey comments “I would highly recommend that recruitment agencies engage with their suppliers now to work together to ensure these changes are implemented compliantly and the commercial implications are managed appropriately.”