Employment Intermediaries and Tax Relief for Travel and Subsistence IPSE response to the HMRC consultation

Transcription

1 Employment Intermediaries and Tax Relief for Travel and Subsistence IPSE response to the HMRC consultation September 2015 Response to HMRC Consultation on travel and subsistence 0

2 Table of Contents 1.0 About IPSE: Independent Professionals Personal Service Companies (PSCs) The Government s proposal on travel and subsistence (T&S) tax relief Summary of concerns Tax compliant PSCs will be denied the relief to which they are entitled Personal service companies (PSCs) will be placed at a competitive disadvantage to professional service companies Problems of definition Transfer of liability Impacts of these proposals on personal service companies The critical role of independent professionals in the UK economy Potential conflicts with other legislation and proposals The IR35 discussion document The impact on women in the workforce An alternative option for reform Summary of recommendations: Appendix I: Results of survey a) Supervision, Direction and Control b) The Engager c) The Employment Intermediary d) Travel and Subsistence: Liability e) Liability (II) f) Impacts Appendix II: Economic Impact Assessment Response to HMRC Consultation on travel and subsistence 1

3 1.0 About IPSE: The Association of Independent Professionals and the Self Employed (IPSE) represents the estimated 4.5 million individuals working for themselves in the UK. Over 97% of our members work through their own limited companies. This response has been based on consultation with IPSE s membership via a targeted survey, our online forums and a dedicated address. A report of the survey is included in Appendix I. Also included in this response are real life case studies of independent professionals that will be impacted by the proposals. IPSE is grateful for this opportunity to respond to the Government s consultation on Employment Intermediaries and Tax Relief for Travel and Subsistence. We are especially grateful to HMRC and HMT officials who have engaged with us at various roundtable discussions and events on this topic. IPSE takes abuse of the tax system very seriously. Abuse of the system undermines those legitimately working in a flexible way such as limited company contractors. However, IPSE has serious concerns about this proposal. 1.1 Independent Professionals Often referred to as freelancers, contractors, consultants and nano-businesses, independent professionals are highly skilled specialists supplying their expertise on a flexible basis to a variety of businesses - from large companies to SMEs. This proposal will curtail, and in some cases stop, the business activities of independent professionals. Frequently, independent professionals will be incorporated businesses. This is driven by commercial necessity. The clients and agencies that engage independent professionals insist on the limited company structure as it protects them from potential employment rights and tax liabilities. These businesses have in recent years begun to be labelled as personal service companies. 1.2 Personal Service Companies (PSCs) To ensure clarity of understanding, IPSE, in this response, will use the term personal service company (PSC). However, the term is problematic. As the consultation document points out, there is no statutory definition of a PSC. Legally, there is nothing which distinguishes a PSC from any other limited company. Nevertheless, the consultation document frequently refers to PSCs. IPSE understands that the Government is referring to what we might describe as limited company contractor businesses. IPSE believes the application of this proposal to PSCs will be particularly damaging, not just to the PSCs themselves, but to their clients and the wider UK economy. Our central recommendation is that PSCs are removed from the scope of this proposal. 1.3 The Government s proposal on travel and subsistence (T&S) tax relief The Government intends to prevent the availability of relief on T&S for those working through an intermediary and working under the right of supervision, direction or control (SDC) of any person. Response to HMRC Consultation on travel and subsistence 2

4 IPSE is concerned about businesses for whom the intermediary is a PSC. IPSE believes the mechanism used to determine whether SDC applies is skewed to produce an under SDC result, even where SDC does not apply to the engagement. This will result in fully tax compliant PSCs not being allowed the relief to which they are entitled. This is our central concern with the proposal, though there are other concerns which stem from this. 2.0 Summary of concerns The proposal fails to recognise the legitimacy of a productive and vital sector of the UK economy. The flexible labour market is a key driver for economic growth. The proposal will put independent professionals at a significant competitive disadvantage to large consulting organisations (which will retain the ability to claim tax relief on subsistence and travel expenses). UK based independent professionals will be put at a competitive disadvantage to independent professionals from abroad, damaging the UK economy and the amount of revenue collected on those engagements. This proposal will create a situation where an individual has one status for travel and subsistence tax relief and a different status for IR35. This would add considerable complexity to the already notoriously complex issues of tax and employment status for the self-employed. The potential transfer of tax liability to the engager is directly at odds with the principle of limited liability status, which is vital to the business-to-business relationship. Transfer of liability to the engager will disincentivise, even wholly prevent, companies from engaging independent professionals. It is not clear how PSCs will be distinguished, for the purpose of applying this proposal, from other limited liability companies. The definitions of supervision, control and direction are open to interpretation, which will make them unworkable in practice. This lack of clarity will only be resolved (and even then, only partially) by case law. Ultimately the definitions will create tensions between the independent professional and the engager and this will give rise to legal challenges. For supervision 86% of IPSE members believe the definition will cause confusion and uncertainty in the marketplace. For direction it s 82%. For control it s 81%. See a full breakdown of the survey results in Appendix I. The definitions of intermediary and engager are unclear, making it extremely difficult to respond coherently to the consultation. Nearly half of respondents (43%) to IPSE s survey were Response to HMRC Consultation on travel and subsistence 3

5 unsure of who the engager would be while only a third (37.4%) believed this meant the end client, which is IPSE s understanding of the definition. Similar confusion applied to the suggested definition of employment intermediary. Almost a third of respondents were unsure who the employment intermediary was. Because of the reasons outlined above, the proposal will prevent fully tax compliant businesses from being unable to claim the tax relief to which they are entitled. 17% respondents to IPSE s survey and many others who responded to our dedicated address said the proposals will force them to close their business altogether, resulting in a loss of tax revenue. Independent professionals will be unable to take contracts a long way from their base, depriving those businesses from valuable opportunities and resulting in a loss of tax revenue. The lack of mobility will also deprive the clients of independent professionals (typically SMEs, larger companies or public sector bodies) from the specialist skills they provide, further damaging the economy. Three quarters of respondents to our survey said they would not be able to take on contracts far from their home or office, if they were unable to claim travel expenses. Firms based outside of the South-East of England will be particularly impacted. The rules pertaining to Onshore Employment Intermediaries and the associated ITEPA reporting legislation are still bedding in and have significantly impacted the market. There are reports that large numbers of self-employed workers have shifted into umbrella structures in order to comply with onshore rules. Introducing further measures that will impact this section of the labour market is likely to result in further, unforeseen shifts in the labour market. The proposal will have a negative impact on women and their flexibility and ability to remain in the workforce. IPSE strongly disagrees with the Summary of Impacts assertion that the measure is expected to have negligible impact on the economy. 1 The measure will have a dramatic and damaging impact on the economy. We estimate the total immediate impact of the proposal will be 19.2bn. See Appendix II for our Economic Impact Assessment. 1 Employment Intermediaries and Tax Relief for Travel & Subsistence, page 20. Published 8 July 2015 Response to HMRC Consultation on travel and subsistence 4

6 3.0 Tax compliant PSCs will be denied the relief to which they are entitled The mechanism proposed by the Government to determine which businesses can claim relief on their travel and subsistence (T&S) expenses, and which businesses cannot, is flawed. Under the new rules the ability to claim tax relief on T&S will hinge on whether the right of supervision, direction or control (SDC) applies to the engagement. The end client (referred to in the consultation document as the engager ) will have the responsibility of determining whether SDC applies. The problem with this approach is that it assumes end clients will take a considered view on whether SDC applies to each individual engagement. Where the end client is a comparatively small company, engaging one or two PSCs, this might happen. Larger clients, however, which engage hundreds, maybe even thousands, of PSCs at any one time, will not consider engagements individually. To do so would incur a huge administrative effort that clients will simply not want to take on. They will take a holistic approach to SDC. They will say either that all PSCs are under the right of SDC, or they are all not. Clients are considerably more likely to say the right of SDC exists, as this makes more commercial sense. They will be unwilling to sign away the right of SDC on all their engagements as they would fear it would prevent them from being able to retain ownership of the projects they wish to be completed. This problem is compounded by the vague definitions of supervision, direction and control provided in the document (these definitions are discussed later in this response). HR Departments will consider those definitions and feel they cannot sign away the right to SDC, as it would leave them too exposed to non-employed workers delivering a service or product that the clients might consider unsatisfactory. It will simply be less risky to declare all engagements are under the right of SDC. The problem will be further compounded if tax liability is transferred to the end client, as outlined in Option 1 of the consultation document (the transfer of liability options are also discussed more fully later in this response). Under this option, not only will clients fear the commercial risks of signing away the right to SDC, but they will also be shouldering a tax liability risk if it is later discovered the right to SDC does (or did) apply to the engagement. Considering the natural reluctance of the end clients to sign away the right to SDC, the vague definitions of SDC and the potential tax liability that could only be incurred if they do sign away the right to SDC, it is difficult to imagine a scenario where a large client will determine the right to SDC does not exist. This will result in all of the PSCs engaged with that client being unable to claim tax relief on their T&S expenses, regardless of whether the right to SDC applies in practice and even where those PSCs would be considered genuinely in business on their own account by any other measure, such as IR35. There is a very real danger therefore that this proposal will create a situation where an individual has one status for T&S and one status for IR35. This would add considerable complexity to the already notoriously complex issues of tax and employment status for the self-employed. (Conflicts with IR35 and the concurrent discussion on IR35 reform is considered later in this document.) Ultimately, the SDC decision being made by the client will lead to fully tax compliant PSCs not being allowed the relief to which they are entitled. Response to HMRC Consultation on travel and subsistence 5

7 4.0 Personal service companies (PSCs) will be placed at a competitive disadvantage to professional service companies The consultation document specifically exempts professional service firms from the new rules, as their business is not substantially in the supply of labour. 2 In reality PSC often compete for contracts against large consultancies which offer the same services via their staff. The large consultancies will be able to claim tax relief on the expenses incurred by their staff, while PSCs will not. This will put independent professionals at a significant competitive disadvantage to large consulting organisations or, in other words, the very smallest UK businesses will be unable to compete against the very biggest. Most of the s IPSE has received on the T&S proposals highlight the anti-competitive issue as a major concern. Below is a typical example. The has been edited to remove company names but otherwise remains unaltered. Case study 1 Dear IPSE Like many of my fellow interims I feel extremely concerned by the attack on working people like me that the government intends to inflict through its tax changes. I m currently working on a large programme that is revolutionising Cheque processing for a well-known bank. The make-up of the workforce on this programme is roughly 10% bank permanent staff and 90% is a mix of interim contractors and staff from a well-known professional services company. This highlights the already competitive market interims have to operate in and why we have to travel longer distances to obtain work. Not being able to offset these travel and accommodation costs against revenue will ultimately cause the following problems: 1. To safeguard our futures interims will need to pass on the cost to the client (via an agency) - or ultimately lose work/lose income. 2. The banks will not want to pay this increase so they will employ greater number of staff employed by consultancies / professional service firms. 3. This will reduce the ability of British interims to compete against this racket. That also means that if we are working less we will ultimately be paying less VAT into HMRC s coffers. It seems to me that the government is naive if it thinks that we will all carry on producing the same annual revenue. By not being able to compete we will end up paying less VAT too. This proposal will only benefit big corporations. 2 Employment Intermediaries and Tax Relief for Travel & Subsistence, page 13. Published 8 July 2015 Response to HMRC Consultation on travel and subsistence 6

8 Competition from abroad UK based independent professionals will be put at a competitive disadvantage to independent professionals from abroad, if the proposals are enacted. This is because it will be more cost effective for an independent professional in, for example, the Netherlands, to take on a project in Manchester than it would for an independent professional based in Newcastle. In this example, the Dutch independent professional could claim relief on his or her travel and subsistence expenses, while the Newcastle based PSC could not. The UK business will clearly be disadvantaged in such a scenario. The result will be a negative impact on the UK economy and the revenue collected on those engagements may well be entirely lost. Response to HMRC Consultation on travel and subsistence 7

9 5.0 Problems of definition Personal Service Companies As stated earlier in this document, personal service companies are not legally defined. It is difficult to see therefore how the new rules will be applied to PSCs but not to other limited companies. For example, an end client might engage a limited company to supply a project manager. At the same time the same end client might engage a limited company to service all of its electrical equipment. Perhaps HMRC might expect the new rules to apply to one engagement and not the other, but it will not be clear to the end client. Professional Service Firms There is another definitional problem with professional service firms. Many IPSE members have said their company is a professional service firm, albeit they operate on a smaller scale than some of the well-known large consultancies. In practice, they are a company which supplies specialist services, in exactly the same way as their larger competitors. These businesses will therefore feel the exemption that applies to professional service firms should equally apply to them. Supervision, Direction, Control The definitions of supervision, direction and control are open to interpretation, which will make them unworkable in practice. For supervision 86% of IPSE members believe the definition will cause confusion and uncertainty in the marketplace. For direction it s 82%. For control it s 81%. A full breakdown of the survey results can be seen in Appendix I. As mentioned previously in this response, the definitions are too vague and could be interpreted to apply to all engagements. To take the supervision definition as an example: Supervision is someone overseeing a person doing work, to ensure that person is doing the work they are required to do and it is being done correctly to the required standard. Supervision can also involve helping the person where appropriate in order to develop their skills and knowledge. 3 Overseeing the work of an independent contractor would be considered by many to be standard business practice. It does not mean the contractor is being told what to do, it just means the client retains the right to keep an eye on that work and point things out when they are going off-brief. Clients will not want to sign away the right to oversee the work being done. Even if that right is seldom exercised, clients will want to retain it. 3 Employment Intermediaries and Tax Relief for Travel & Subsistence, page 14. Published 8 July 2015 Response to HMRC Consultation on travel and subsistence 8

10 HR Departments will consider these definitions and feel they cannot sign away the right to SDC, as it would leave them too exposed to non-employed workers delivering a service or product that the clients might consider unsatisfactory. It will simply be less risky to declare all engagements are under the right of SDC. The PSC on the other hand may feel that SDC does not apply to the engagement as they work autonomously, delivering specialist skills which the client has little understanding of. There will therefore be a clash of opinion over whether SDC applies. The confusion caused by these unclear definitions will only be resolved (and even then, only partially) by case law. Ultimately the definitions will create tensions between the independent professional and the engager and this will give rise to legal challenges. To address this, IPSE recommends the definitions are revised to ensure there is less ambiguity over whether SDC applies. The definitions should be tightened to ensure genuinely autonomous workers are less likely to be caught. A definition of autonomous working should also be supplied, so that clients and intermediaries can positively identify compliant behavior. Employment Intermediary and engager The definitions of intermediary and engager are also unclear. IPSE believes that where the worker uses a PSC, the PSC is the intermediary. We believe the engager refers to what we might describe as the end client or end user. Nearly half of respondents (43.7%) to IPSE s survey were unsure of who the engager would be while only a third (37.4%) believed this meant the end client. Similar confusion applied to the suggested definition of employment intermediary. Almost a third of respondents were unsure who the employment intermediary was. IPSE recommends the definitions of intermediary and engager should be clarified. In each instance the terms are used in government guidance it must be absolutely clear who is and who is not being referred to, to avoid marketplace confusion. Response to HMRC Consultation on travel and subsistence 9

11 6.0 Transfer of liability The consultation document offers two options. Option 1 liability is shared evenly between the client and the PSC Option 2 liability remains with the PSC (unless the engager has misled the intermediary) Following round table discussions with HMRC, we understand that a third option is being considered. IPSE s understanding of this option is as follows: Option 3 Liability is shared between the client and the PSC. In the event that the PSC has been clearly told that SDC exists, but then claims tax relief anyway, liability rests entirely with the PSC. IPSE believes option 2 is preferable but this is dependent on the SDC decision also remaining with the PSC. As explained earlier in this document, the client should not have to decide whether SDC exists. Clients will not consider individual engagements, but rather will take a holistic approach to SDC either all of their PSC engagements are under the right of SDC, or they are all not. In addition there is a commercial incentive to retain the right of SDC, even if it doesn t exist in practice. IPSE members also believe this decision should not rest with the engager. 67.2% disagree or strongly disagree that the end client should determine whether SDC exists, while just under one in every five respondents (18.6%) to IPSE s survey believed the end client should have this responsibility. (See survey results in Appendix I). It makes more sense for the PSC to determine whether they are under SDC if they want to claim travel and subsistence relief. They will be better placed to determine whether SDC applies to their engagement. In these circumstances, it would be much more appropriate for the liability to remain with the PSC. IPSE believes the transfer of both the tax liability and the SDC decision to the engager will: Incentivise clients to declare SDC exists, in order to avoid risk Disincentivise, and perhaps even wholly prevent, companies from engaging independent professionals, as they will fear being saddled with the tax bill of an entirely separate company. The potential transfer of tax liability to the engager is also directly at odds with the principle of limited liability status, which is vital to the business-to-business relationship. If HMRC press ahead with plans to make the end client (more specifically the engager) responsible for identifying whether SDC exists, then 56% of respondents believe the end client should be liable for any outstanding tax obligations. Response to HMRC Consultation on travel and subsistence 10

12 7.0 Impacts of these proposals on personal service companies 17% of respondents to IPSE s survey and many others who responded to our dedicated address said the proposals will force them to close their business altogether. The proposal will also mean independent professionals will be unable to take contracts a long way from their base, depriving those businesses from valuable opportunities and resulting in a loss of tax revenue. The lack of mobility will also deprive the clients of independent professionals (typically SMEs, larger companies or public sector bodies) from the specialist skills they provide, further damaging the economy. Three quarters of respondents to our survey said they would not be able to take on contracts far from their home or office, if they were unable to claim travel expenses. The below from an IPSE member is a typical example. The has been edited to remove names. Case study 2 I am an Oracle functional consultant, mainly working on projects through my own limited company. I am normally on the client s site Monday to Friday travelling and staying in hotels. In the last year I have worked in London, New York, Hong Kong, Kuala Lumpur and Jakarta. In previous years I have worked in Sheffield, Leeds, Liverpool, North Wales and Berkshire. In the last year my travel and expenses have totalled 48K which represents 28% of my company s turnover. Without tax relief on these costs, my business would not be able to operate. The supervision, direction or control test is sufficiently widely drawn that virtually everybody, whether they are working in support or project roles, will be caught and unable to claim travel and expenses. The client, fearing the risk of liability, will simply declare that supervision, direction or control exists, regardless of the actual working practices. I have heard that some contractors will seek to raise their rates to compensate for the loss. This will not be possible for me. I live in the Midlands and often compete against consultants from London for a London client. These clients would not be interested in uplifting my rate to compensate me for my increased T&E costs. I would only be able to take roles in the Midlands where I can commute from home. Due to the dearth of clients in that area, it s likely I will need to give up my limited company altogether and work for a consultancy, although at my age that might be difficult. This will have a significant impact on a lot of software companies that depend on contractors to deliver their projects. There are many others out there like. If these consultants also decide that they can only work locally the scarce projects outside of London will be over-supplied with resource and the London projects will struggle to fill positions. Ultimately this proposal will hit not just contractors like me, but also the businesses that rely on us to deliver the specialist skills they need. Response to HMRC Consultation on travel and subsistence 11

13 8.0 The critical role of independent professionals in the UK economy Research by Professor Andrew Burke has shown independent professionals play a pivotal role in the UK economy. 4 They are sources of and conduits for innovation in both corporations and SMEs They liberate businesses from the limits of their internal resource base and enable the use of exceptional talent that would otherwise not be economically feasible to hire on employee contracts They enable de-risking of some of the uncertainties of the market so that firms can reduce the risk of growing They reduce the amount of finance required for innovation and business start-ups They promote efficiency-driven economic performance They reduce barriers to market entry and reduce minimum efficient scale They enable businesses to maximise performance across peaks and troughs in demand They create jobs by increasing the level of innovation and efficiency in the economy and helping new projects succeed They enable businesses to manage, in fact reduce, entrepreneurial risk and so promote innovation and enterprise There are now an estimated 1.77 million Independent Professionals in the UK, an increase of 70% since Four in ten independent professionals are women, and the number of women going into freelancing has been increasing rapidly; up by 27% since 2008, with the proportion of mothers who freelance rising by 55% in this period 6. A growing number of the UK s most talented graduates and young professionals are now freelancers and those aged under 29 make up the fastest growing segment of the freelance workforce, increasing by 38% since Independent professionals contributed 95 billion to business turnover in , more than the automotive industry 9. They are vital to businesses and the wider economy because of the unique and distinct function they serve, something that 87% of SMEs and 77% of large firms agree with Professor Andrew Burke, Bettany Centre for Entrepreneurship at Cranfield School of Management The Role of Freelancers in the 21st Century British Economy, page 2, published Kitching, J. (2014) The Growth of Freelance Working in the UK, Unpublished. 6 Kitching, J. (2013) Exploring the UK Freelance Workforce, Unpublished; Kitching, J. and Smallbone, D. (2012) Exploring the UK Freelance Workforce, Unpublished. 7 Ibid. 8 Ibid. 9 SMMT, 10 Burke, A. and ComRes (2013) The Value of Freelancers to the British Economy: New Statistical Evidence. Unpublished. Response to HMRC Consultation on travel and subsistence 12

14 As stated earlier, this proposal will impact a very large proportion of the total population of independent professionals, even where they are clearly not under SDC. For this reason the proposal will reduce the economic benefits outlined above. An economic impact assessment is available in Appendix II of this submission. IPSE has received over 300 s from concerned members on the T&S proposals. The example below provides a firsthand account of how not just the PSC but the clients, and therefore the wider economy, will be impacted. This has been reproduced here exactly as it was written. Case study 3 Dear IPSE I am a freelance consultant working in a very specialised area of insurance company transfers (there are only projects in the UK each year). All of my work is outside the area where I live (Cumbria) and requires significant travel but this was a choice I made 12 years ago as the insurance / financial services companies I worked for moved out of the area and we wished to keep our family home here whilst still allowing me to have a suitable career & support my family. I have successfully run my business since Jan 2003 and have made many sacrifices to allow my family to remain in the area and support them. Whilst I have been very successful overall, there have also been very lean periods where I have no client work there was a period of 2 years where the market was very poor and highly competitive where I could not secure client work at a reasonable rate. I knew that freelancing in such a highly specialised area could be feast and famine and I have planned prudently to ensure my business and my family could survive through the difficult and prolonged periods. I have achieved this without drawing any state benefits, even during the 2 years without client work, and have continued to contribute to the economy via corporation and personal taxes, as well as the value I generate for my clients in successfully delivering projects which result in substantial profits ( 10m- 50m), again generating corporation tax. I wish to continue freelancing but the latest Budget proposals mounted a significant attack on freelancers like myself which will seriously undermine our competiveness, the value and skills we can bring to the economy and will damage entrepreneurship with the UK. For a typical project in London requiring several days on site each week, travel and subsistence costs can run to 25-35k per annum. This means I am already at a competitive disadvantage if I wish to recover these costs compared to other freelancers and other large businesses who already operate in the London area. I have already lost several contracts due to this and the proposal to tax them further would further increase the competitive disadvantage I face. Given that I am one of the leading specialists in the UK having successfully completed 14 projects, this would significantly impair my ability to take on such contracts and further erode the benefits of being an independent freelancer compared to the risks involved. This would not only reduce the profitability of my own business and result in lower corporation tax, VAT and employment taxes being generated if I take on lower value work, it would reduce the specialist expertise available to my clients and result in lower profitability for them (and therefore lower overall corporate taxes) since they would have to go to specialist advisors (lawyers, actuarial consultants etc) who would be much more expensive and more likely to have tax mitigation structures in place. Hence, I believe that the overall government tax take would reduce at the same time as damaging the effectiveness of the UK economy by removing highly skilled freelance services. Response to HMRC Consultation on travel and subsistence 13

15 9.0 Potential conflicts with other legislation and proposals Over the last two years much has changed in the regulatory and legislative landscape for those working in the flexible workforce. Businesses are still grappling with the offshore and onshore intermediaries legislation, the associated ITEPA reporting requirements and the proposed dividend tax. Heaping yet more administrative burden on businesses at this time will make life more difficult for businesses that want to be compliant. There are anecdotal reports that large numbers of self-employed workers have shifted into umbrella structures and PSCs in order to comply with the onshore rules. (IPSE is unable to confirm whether these reports are accurate). Introducing further measures that will impact this section of the labour market is likely to result in further, unforeseen shifts in the labour market The IR35 discussion document IPSE will respond to the IR35 discussion document separately, however, it is clear there is considerable synergy between the two issues particularly in the way they interact with PSCs. As stated earlier in this response, IPSE believes the Government should remove PSCs from the travel and subsistence proposal altogether. If that is not possible, the inclusion of PSCs should be delayed until after the discussion on IR35 has concluded. Under the current proposal it will be possible for a PSC to have one status for travel and subsistence and a contradictory status for IR35. This will add considerable complexity to the already notoriously complex area of employment status. Depending on the outcome of the IR35 discussion, it might be possible to create a simplified system whereby travel and subsistence tax relief will not be available where the engagement is caught by IR The impact on women in the workforce Four in ten independent professionals are women, and the number of women going into freelancing has been increasing rapidly; up by 27% since 2008, with the proportion of mothers who freelance rising by 55% in this period 11. The Government should consider the impact of this proposal on women and the consequent effects it will have on their flexibility and ability to remain in the workforce. 11 Kitching, J. (2013) Exploring the UK Freelance Workforce, Unpublished; Kitching, J. and Smallbone, D. (2012) Exploring the UK Freelance Workforce, Unpublished. Response to HMRC Consultation on travel and subsistence 14

16 12.0 An alternative option for reform Representatives from HMRC kindly attended a roundtable of IPSE members to discuss the T&S proposal. During the discussion a possible alternative option was briefly discussed which involved placing a maximum limit of distance, under which tax relief would not be available. The example used (for the purpose of the discussion only) was 10 miles. In this example tax relief would not be available on travel expenses where the distance travelled is less than 10 miles. On distances beyond 10 miles the relief would be available. This option would be considerably simpler than the current proposal and would allow businesses that incur significant T&S costs to claim the relief they rely upon. IPSE would be interested in exploring this option further. Response to HMRC Consultation on travel and subsistence 15

17 13.0 Summary of recommendations: The summary of concerns explains why IPSE strongly recommends government should reconsider this proposal entirely. However, Government has made it clear it intends to proceed with the measure regardless of objections from industry, in which case IPSE recommends: Delay the introduction of any proposed legislation until the impact of the Onshore Intermediaries legislation and associated ITEPA reporting requirements has been comprehensively analysed and reported. Consider the impact of the proposals on the flexible labour market, the companies which rely on the flexible supply of specialist skills, and the wider economy. Consider the impact on overall tax revenue if independent professionals cease activity altogether, are replaced by foreign nationals that pay no tax in the UK, or are replaced by large consultancies which are taxed differently and are able to claim a wide range of reliefs. The definitions of intermediary and engager should be clarified. In each instance the terms are used in government guidance it must be absolutely clear who is and who is not being referred to. The definitions of supervision, control and direction should be clarified. A definition of autonomous working should also be supplied, so that clients and intermediaries can positively identify compliant behavior. PSCs are removed from the scope of the proposals. PSCs are not defined in law and so it is not practical to apply legislation that does not apply to all limited companies. If it is not possible to remove PSCs entirely from the scope of the proposals, the inclusion of PSCs should be delayed until after the discussion on IR35 has concluded. If PSCs are to be included, the decision on whether SDC applies should rest with PSC. The PSC will know whether SDC applies, while the engager will not and, in the case of large engagers, will need to take a holistic approach to SDC. They will be incentivised to declare that all PSCs engagements are subject to SDC and will not consider individual engagements. For these reason the PSC will be able to make a more accurate judgment on SDC. Assuming the SDC decision does rest with the PSC, tax liability should not be transferred to the engager as set out in Option 1. Instead liability should remain entirely with the intermediary (by which we mean the PSC ) as set out in Option 2. If PSCs are ultimately included in the proposal, and the SDC decision and tax liability rests with the engager, the very smallest companies in the UK - PSCs will be placed at a competitive disadvantage to the very biggest. In order to address this imbalance, the ability to claim relief for travel and subsistence should be removed entirely, from all companies. IPSE considers this option to be the least palatable, though it would level the playing field between personal and professional service companies. Response to HMRC Consultation on travel and subsistence 16

18 Appendix I: Results of survey IPSE asked its members about the upcoming changes to travel and subsistence expenses, which could mean many members find themselves unable to claim for these expenses. a) Supervision, Direction and Control The changes rest on proposed definitions of supervision, direction and control (SDC) Thinking specifically about the definitions of supervision, direction and control to what extent, if at all, do you agree with the following statements? % who agree or strongly agree SUPERVISION DIRECTION CONTROL % who disagree or strongly disagree % who agree or strongly agree % who disagree or strongly disagree % who agree or strongly agree % who disagree or strongly disagree The definition is clear The definition will create confusion and uncertainty in the marketplace I understand how the definition applies to my engagement It will be easy to apply the definition with certainty, making me sure of my tax status It will be easy to apply the definition with certainty, making me sure of my employment status The definition is subjective, which will lead to disputes with my client The definition is subjective, which will lead to disputes with my agency Note: Percentages do not add up to 100%: neither agree nor disagree and don t know are not shown. At least 2,424 respondents. Variation is due to each statement being treated as a different question On these proposed definitions, all three were found to be problematic by a significant proportion of respondents. Supervision stood out however, an overwhelming 82.3% disagreed or strongly disagreed the definition will be easy to apply with certainty in order to understand their tax status. With Direction 80.7% disagreed or strongly disagreed that the definition could easily be applied. Similarly for Control 78.9% disagreed or strongly disagreed the definition will be easy to apply with certainty in order to understand their tax status. An overwhelming 85.8% either agreed or strongly agreed that the definition of supervision would cause confusion and uncertainty in the marketplace. This fell slightly to 82.4% for direction, and 81.1% for control. This is concerning for at least four out of five members. Response to HMRC Consultation on travel and subsistence 17

19 A key concern for all three definitions was how subjective they were. Respondents were particularly concerned about disputes with their clients as a result of this. More than three quarters agreed or strongly agreed this would happen with respect to supervision, with broadly the same numbers applying to both direction and control. b) The Engager The proposals are almost certain to confuse independent professionals in their current form. The proposals suggest that the engager should be responsible for deciding whether supervision, direction and control exists. We provided respondents with HMRC s definition of engager and asked them to identify who they understood the engager to be. Nearly half of respondents (43.7%) were unsure of who the engager would be while only 37.4% believed this meant the end client, which is IPSE s understanding of the definition. This means almost two thirds of respondents are either unsure or do not identify with the engager as the end client. This is concerning because we believe this is HMRC s intended definition. 2,400 respondents Response to HMRC Consultation on travel and subsistence 18

20 c) The Employment Intermediary Similar confusion applied to the suggested definition of employment intermediary. Almost a third of respondents were unsure who the employment intermediary was (32.2%). 2,380 respondents Response to HMRC Consultation on travel and subsistence 19

21 d) Travel and Subsistence: Liability 2,372 respondents Just under one in every five respondents (18.6%) believes that the end client should be responsible for deciding whether supervision, direction and control (SDC) exists. Over two thirds of respondents (67.2%) do not believe the end client should be responsible for deciding whether SDC exists. 2,375 respondents If HMRC press ahead with plans to make the end client (more specifically the engager) responsible for identifying whether SDC exists, then just over half (56.2%) of respondents believe the end client should be liable for any outstanding tax obligations. Response to HMRC Consultation on travel and subsistence 20

22 e) Liability (II) Most respondents do not believe the end client should be responsible for deciding whether Supervision, Direction and Control exists in contract (Q13). However when asked to assume this is the case, 56.2% said the end client should be liable for outstanding tax obligations. When this group was asked why they came to this view, 83% said that if the end client is responsible for determining their status, then they should be liable for outstanding tax. Note: Percentages do not add up to 100% as more than one response could be selected. 1,326 respondents Of those that said the end client should not be liable for the outstanding tax obligations, more than nine in ten said this was because they believed this should not be the case in a business to business relationship. More than two thirds (72.7%) were concerned that if the end client is liable for outstanding taxes, they will not use contractors at all. Note: Percentages do not add up to 100% as more than one response could be selected. 458 respondents Response to HMRC Consultation on travel and subsistence 21

23 f) Impacts Over three quarters of respondents say they would not be able to take on contracts far from their home or office if they were unable to claim travel expenses. Almost one in five respondents (17%) would stop contracting altogether 84.7% would have to raise their day rate to compensate. Only 6.5% believe the rules would not affect the way they work Note: Percentages do not add up to 100% as more than one response could be selected. 2,358 respondents Response to HMRC Consultation on travel and subsistence 22

24 Appendix II: Economic Impact Assessment Travel and Subsistence measuring the cost IPSE surveyed its members (see Appendix 1) to find out the potential impact the changes to travel and subsistence rules would have on their business. Many freelancers and self-employed people travel far and wide to access contracts, this flexibility is in fact one of their most desirable assets to the companies which engage them. Working in this way however does come at a cost, the average IPSE member spends in excess of 8,000 a year on costs associated with working far away from base, meanwhile the average employee spends only around 2,000 a year getting to and from their place of work. 12 The average respondent to IPSE s survey also reported travelling around 1,800 miles every month over the past year. Census statistics show the average employee with a regular home to work commute travels around a third of this distance within a month, 650 miles. Additionally, every month the average IPSE member spends 8 nights away from home in order to be close to their engagers location. It is easy to see, therefore, how costs of working so flexibly can add up. It is for these reasons that a large proportion of IPSE members are worried about how this will affect their business and are considering changing the way they currently work. A concerning proportion (17.1%) of members feared that they would have to stop contracting all together if the rules were changed to mean that they could not claim travel and subsistence tax relief. HMRC estimates there are around 265,000 PSCs that work in the same way as IPSE members tend to. The average IPSE member has an average turnover of 107k per annum. We can estimate therefore that the UK s PSCs generate a total of 28.4bn of economic output. If 17% of these businesses were to close it would cost the UK economy around 4.5bn a year. As a sizable proportion of freelancers are also near or older than retirement age (9.3% of IPSE Freelancer Confidence Index are age 60+) it is highly likely that they will not just engage in less flexible, satisfactory and productive work but they will cease working all together. A significant proportion of the aforementioned output would forever be lost. In addition a large majority, 76.3% of IPSE members said they would not be able to continue to take contracts that are far away from base. Currently, 68% of contracts that engage IPSE members are more than double the distance of the average commute for an employee. This is the marker IPSE have used to qualify what may be regarded as far away from base. This accounts for 14.7bn of annual economic output which would temporarily be impacted while these businesses are forced to readjust, some of which would potentially never be regained Response to HMRC Consultation on travel and subsistence 23

25 The total immediate cost to the economy of introducing this proposal will therefore be: 4.5bn (caused by contractor businesses which stop operating altogether) bn (caused by contractor businesses not travelling to businesses sites that are far away) Immediate cost to the economy = 19.2bn N.B This assessment has not considered the impact on those businesses which rely on the flexible expertise of independent professionals who will no longer be able to attract those specialists. The total impact is therefore likely to be higher than stated. For further information please contact: Andy Chamberlain Deputy Director of Policy and External Affairs, IPSE Heron House 10 Dean Farrar Street London SW1H 0DX T: E: andy.chamberlain@ipse.co.uk Response to HMRC Consultation on travel and subsistence 24

26 Response to HMRC Consultation on travel and subsistence 25