As of April 6th 2016 legislation restricting T&S expenses for umbrella contractors becomes the law.
Essentially, it seems the government believes that it is unfair that contractors (especially those on their umbrella’s payroll) claim tax relief on travel and subsistence expenses for home-to-work travel costs, when permanent employees (workers on their end-user’s payroll) cannot.
Consequently, HM Revenue & Customs decided that workers who operate through an intermediary (recruitment agency, umbrella company or PSC) would no longer be able to claim tax relief on travel and subsistence expenses if they are under the Supervision, Direction or Control (SDC) of anyone within the contractual chain. This denial of tax relief, effective today, will also apply to such contractors if anyone in the chain merely has the ‘right’ to supervise, direct or control them, even if that person doesn’t exercise the right to SDC
So from now onwards, HMRC will assume that all contractors who work through an intermediary will be under SDC unless they can prove otherwise. But supporting guidance from the Revenue on how to ascertain suitable evidence of ‘no SDC’ is all but non-existent. This is a shame; proving a negative can be a notoriously tough task.
Not just umbrella contractors who’re caught
Also as of Wednesday April 6th 2016, workers who operate through a PSC only fall under this legislation if they also fall inside IR35 However, if you worked outside IR 35 and were later found to be inside IR35, not only are you going to have to pay additional taxes to make up the difference between PAYE and dividends, but you will also have to pay back any tax relief that you’ve received on T&S expenses, plus interest and penalties.
So in both practical and financial terms, some serious change is afoot for a considerable number of contractors. To clarify, from today, no expenses can be processed by an umbrella company for payment after this date, even if the expenses are incurred prior to the legislation coming into force. So if you haven’t received your payslip and payment by April 6th 2016, then any previously ‘allowable’ expenses will have to be claimed via self-assessment; your brolly will no longer be able to process them.
Tougher HMRC Rules
And also under today’s legislative changes, HMRC will regard an umbrella company contractor’s workplace as ‘permanent.’ In addition, travel between your home and the workplace is regarded as ordinary commuting and any travel costs do not attract tax relief. If however, you have a client that is willing to pay you chargeable expenses in respect of travel between your home and your workplace, then it is worth noting that those chargeable expenses would now be subject to income tax and National Insurance Contributions. As for other chargeable expenses, as long as these are a straightforward reimbursement of actual expenditure incurred, then those expenses can be paid back to you free of income tax and NICs.
But all parties need to be on their guard. The now in-force T&S legislation contains an element of ‘debt transfer’, which means that anyone in the contractual chain that provides false evidence could be held liable by HMRC. Provisions have also been included to prevent the organised misuse of PSCs in order to avoid the restrictions. But as outlined earlier, using your own PSC, that you can run independently, is not caught by the T&S legislation, providing that your assignments when operating your own PSC are outside IR35.
So what’s the big picture? Well, when introduced some 15 years ago, umbrella companies were designed to provide contractors with a compliant alternative to running their own limited company; they were not designed with a primary purpose of providing tax relief on expenses as a way of taking home more money. The misuse of umbrella companies for this purpose has unfortunately meant that we are now seeing a knock-on effect for the ‘true’ contractors in the UK. So is this the end of the umbrella company? Absolutely not. A compliant umbrella, working within HMRC guidelines, and not looking to offer any work around for expenses, is still by far the safest option for contractors who want to stay on the right side of the taxman.