Employment Intermediaries and Tax Relief for Travel and Subsistence Response by the Chartered Institute of Taxation

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1 Employment Intermediaries and Tax Relief for Travel and Subsistence Response by the Chartered Institute of Taxation 1 Introduction 1.1 The Chartered Institute of Taxation (CIOT) sets out below its response to the proposal to remove home-to-work travel and subsistence tax relief for a worker engaged through an employment intermediary and who is subject to supervision, direction or control (SDC). 1.2 The proposed approach to restricting tax relief follows on from previous discussion documents looking at travel and subsistence expenses, most recently the December 2014 HMRC discussion document on Overarching Contracts of Employment (OACs) to which the CIOT responded on 10 February Budget 2015 announced that following the December 2015 review the Government will change the rules to restrict travel and subsistence relief for workers engaged through an employment intermediary, such as an umbrella company or a personal service company, and under the supervision, direction and control of the end-user. 1.4 The current consultation document is not about whether to change the rules but the implementation of the Government s policy. Accordingly, the CIOT s response to this consultation concentrates on the implementation of the Government s stated policy rather than the underlying policy itself. 2 Executive summary 2.1 While we do not believe that implementing a blanket restriction on claiming tax relief on travel and subsistence expenses incurred by workers engaged through employment intermediaries, where there is (i) personal service and (ii) supervision, direction and control, is the right approach we nevertheless note that the Government s policy is to implement such a change with effect from April 2016.

2 2.2 The proposed approach is to treat the affected engagements as being separate employments for tax purposes and so subject to the rules in sections 337, 338 and 339 of ITEPA 2003 which, amongst other things, prohibits a tax deduction for travel which is ordinary commuting. This would then have the effect of denying relief for home to work travel for the individuals concerned. We believe this should achieve the Government s policy objective if the definitions of employment intermediary and personal service company are made very clear so that there is no misunderstanding as to which entities are caught. Without this then it will be impossible to sort the sheep from the goats with the result that there will be (i) non-compliance through ignorance and (ii) workers not claiming tax relief when they are entitled to do so. 2.3 We believe that clear legislative definitions supported by adequate guidance will be essential. For example, in relation to what are (or are not) personal services ie the difference between the provision of services by a worker and the provision of personal services. 2.4 The distinction between a supply of services and a supply of labour also needs to be clear. For example, where someone is skilled in their job and contracts with a client to perform work for them, is this a supply by the company of labour, or of services? 2.5 Furthermore, clarity will be needed in defining which businesses are involved substantially in the supply of labour. This is not least as regards service companies which exist in the context of groups of companies, and whose function is indeed precisely to supply labour to other companies within the group. For example, where an employee of a service company is sent on secondment to a client for six months (and under their SDC) we assume the intention would not be to deny tax relief for travel and subsistence. 2.6 Additionally, in the context of the new agency rules at section 44 ITEPA 2003 there are already 17 pages of guidance for three words supervision, direction or control (SDC) but determining SDC remains very difficult in practice and is equally likely to be key under these proposals. 2.7 We have referred above to group service companies but care will also be required in the context of companies that have outsourced services to a third party, be they catering services, HR services, IT services, security services etc. For example, where the individuals concerned are fungible in the sense that they might work on one engagement at one site for a period of time and then move to another and then back to the first, it would appear that (if we assume that there is SDC at each site and that personal service is provided), if each site is deemed to be a permanent workplace then the employee gets no relief for his/her travel costs. In effect, what are in fact a series of temporary workplaces would seem to be treated like a succession of permanent workplaces which would clearly be unfair. 2.8 We believe that any transfer of debt provisions should follow on from the existing agency/employment intermediary provisions. In other words, any failure on the intermediary s part to correctly account for PAYE/NICs on travel and subsistence payments should only transfer to the engager where the engager has deliberately misled the intermediary in terms of stating there is no SDC. In this respect we favour Option 2 in the consultation document. 2.9 We also think HMRC should publicise its compliance activity successes more widely, particularly in regard to the so-called pay-day-by-pay-day model and the apparent claiming of NIC relief for an employee incurred expense. P/tech/subsfinal/ET/2015 2

3 3 The issue 3.1 The foreword to the consultation document notes the Government s desire for a flexible workforce but also its commitment to ensuring the tax system is not exploited. 3.2 Chapter 2 of the consultation document confirms that workers engaged through an employment intermediary, including umbrella companies and personal service companies (PSCs) may in certain circumstances claim tax relief for travel and subsistence expenses incurred in travelling to workplaces for less than 24 months. 3.3 It has been the case that an employee, however engaged, travelling to a temporary workplace can quite legitimately claim tax relief (or be reimbursed tax-free) for the cost of travel to a temporary workplace. This itself does not appear to be the issue. 3.4 The issue appears to be that employees engaged via employment intermediaries have increased significantly (page 9), with consequent increases in travel and subsistence expense claims by this group. A distinction is then made between (i) specialist contractors and similar workers using umbrella companies (who presumably the Government were content to permit claiming tax relief) and (ii) other workers with less specialised skills, with the latter being the cause of the significant increase in numbers. 3.5 The consultation document goes on to explain that it was never Parliament s intention to allow most temporary employees to be able to claim relief for the full cost of ordinary travel for all their journeys from home to their place of work. And indeed under existing rules there is no tax relief for ordinary commuting (see page 8). 3.6 However, a temporary worker does not generally have an established home-to-work journey and therefore does not undertake ordinary commuting in the sense of a usual, normal or common journey. As such the journey to his/her temporary workplace can be more costly than that of a permanent employee travelling to the same workplace and Parliament has therefore decided that in this context that tax relief for home to temporary workplace travel is appropriate. 3.7 The issue therefore, as pointed out in the consultation document, is that employment intermediaries employ individuals under long term employment contracts so that, whereas if taken on directly by the end client for a limited period, no tax relief for home to work travel would apply (as it would be ordinary commuting) this is not the case where the employment is ongoing; instead there are a series of temporary workplaces. And it is the increasing interposition of such intermediaries which the government is concerned and the related higher cost to the Exchequer. 4 The proposal 4.1 The Government s proposal to address the increased number of tax relief claims is to prevent entitlement to travel and subsistence tax reliefs for home-to-workplace travel for a worker that is engaged through an employment intermediary (page 12). 4.2 This restriction will however only apply where the worker is (i) supplying personal services and (ii) there is SDC. We assume that the intention is that specialist contractors etc. are less P/tech/subsfinal/ET/2015 3

4 likely to be, for example, subject to (or subject to the right of) SDC by any other person over the manner in which he/she provides his/her services so will continue to be able to claim tax relief as before and as, presumably, intended by Parliament. Thus, somewhat perversely, the new rules are likely to hit lower paid workers more than higher paid skilled contractors (who, in any event, are likely to be in a better position to negotiate a higher fee should the new rules apply to them). 4.3 Where the restriction applies the employment intermediary is to treat each engagement for that worker as a separate employment so that home-to-workplace travel is not eligible for tax relief. 4.4 We assume however that if the worker works away from the engagers workplace, eg is sent to visit a different client of the engager s or attends a different site of the engager s to that which he/she normal attends, that journey will still be entitled to tax relief. Can HMRC confirm that this is the case please? Specific examples of where this point may arise would include situations where services such as HR services, IT services and IT services have been outsourced to a third party but where the employees concerned are fungible so that they may move from one site to another from time to time, albeit always being under the SDC of the client at each site (see above). 4.5 Definition of Employment Intermediary A clear, concise and understandable definition of an employment intermediary will be a key aspect to these rules working as intended. Being able to tell which arrangements are in and which out of the new regime is going to be critical. 4.6 The proposal is that an employment intermediary will be an entity,, which interposes itself between a worker and the engager, as part of an arrangement for the worker to provide their personal service to the engager. Furthermore, the employment intermediary s business must be substantially in the supply of labour services. We refer to aspects of this definition in more detail below. 4.7 Supply of labour services It is noted that professional service firms that second staff to clients are not intended to be caught by the new rules because their business is not substantially in the supply of labour. We agree that should be so but this will no doubt lead to a debate as to what a business s business is: the supply of labour or the supply of services? And, of course, what is the definition of a professional service firm? In our view, if the contract is for a job to be done rather than for a person then that is a supply of services. The legislation will need to make clear what the distinction is between the supply of services and the supply of labour. This should be supplemented by examples in the guidance. 4.8 For example, is a small one-person company that, say, repairs boilers supplying labour or services or both and, if the latter, is it substantially the supply of labour? Equally, is a group service company, a company within a group that engages all the employees then supplies the employees to the group s businesses as necessary, engaged in the supply of services or labour? 4.9 Personal services The intention is that a worker must personally provide their services to another person (the engager) or be obliged to do so. P/tech/subsfinal/ET/2015 4

5 4.10 Some clear examples will be needed to distinguish between providing services and personally providing services : eg in the first example at 4.8 above is the boiler repair person personally providing their services to another? And indeed the reference to providing services seems prima facie inconsistent with the idea of an intermediary being involved substantially in the supply of labour (page 13 of the consultation document). Care will be needed in framing the legislation on this point Supervision, Direction of Control (SDC) We note that the SDC test is to be applied in a similar way to that currently used for agency workers. SDC as a test is ground already trodden as regards Section 44(2) of ITEPA with 17 pages of guidance. But HMRC s examples of SDC are still not as comprehensive as they need to be and we think there remains a lot of confusion as to when there is/is not SDC (let alone who is/is not an employment intermediary, eg for the purposes of the Employment Intermediaries Reporting Rules) The current SDC test is too vague and is not very well understood. Often members of the same team can come to different conclusions in the application of the SDC test to the same facts, undermining the Government s level playing field. Indeed, we wonder whether this is something that the government might want to revisit, perhaps in the light of the findings from the recently introduced quarterly reporting regime for employment intermediaries An example of how marginal real life situations can be is Example 2 (page 15). In this case what would happen if the local authority contracts with an IT consultancy business instead and the business does a variety of things around advising on hardware/software, maintenance, etc. but also provide workers on secondment, and when on secondment there is SDC? 4.14 Transfer of Liability We note the proposal that, where the employment intermediary does not comply with the new rules, the liability for PAYE and NICs on non-tax relievable travel and subsistence expenses reimbursed tax-free by the employment intermediary could be transferred to the engager But who is the engager for this purpose? For example, a retailer subcontracts its distribution business to a distributor who obtains drivers through an employment agency and to mitigate insurance liability (on the part of the driver) and employment rights (on the part of distributor and agency) the worker is engaged through a personal service or umbrella company. Is the retailer the engager? Or the distributor? Or the agency? For transfer of liability to work it will need to be obvious who the engager is The current agency worker/employment intermediary rules operate in such a way that liability only falls on the engager where there is false information provided to the intermediary by the engager as regards whether SDC applies. Thus, the intermediary is protected should the engager mislead the intermediary in this respect with the result that the intermediary then fails to operate PAYE/NICs correctly. We think this is fair enough Whether under the travel and subsistence rules the obligation should be on the engager to notify the intermediary of SDC (Option 1) or the intermediary should establish with the engager whether SDC exists (Option 2) is almost immaterial. There is a practical need on both sides to advise (engager) and ascertain (intermediary) whether SDC exists. P/tech/subsfinal/ET/2015 5

6 4.18 We therefore suggest the travel and subsistence rules on advising and ascertaining SDC follow the transfer of debt requirements for engagers/intermediaries under the existing agency rules In our view, the travel and subsistence proposals should be principally addressing employment intermediaries misleading workers, rather than the engager misleading the intermediary. In this respect, in principle the engager should not be held to be liable for the intermediary s misuse of the travel and subsistence tax relief rules provided the correct information regarding SDC has been passed from the engager to the intermediary. The engager has no control over what the intermediary does so the engager should not be on the line if the engager has informed the intermediary that SDC exists Consequently, we think that Option 2 (in so far as allowing HMRC to pursue the engager for any debt that arises for travel and subsistence tax relief misuse) is the better option. The engager should be liable for any misapplication of the travel and subsistence tax relief rules where the employment intermediary can show that the engager misled them as regards whether SDC exists: ie the existing transfer of debt provisions should apply equally to travel and expenses payments Legislative Changes The Government s proposed changes (pages 17 and 18) are noted We feel that it would be useful to test the proposed new legislative framework against a few scenarios to see what happens and whether it does provide a level playing field For example, take J. J lives in London and is employed by ABCD Services Ltd, the group service company for A Ltd, B Ltd, C Ltd and D Ltd. J starts working for A Ltd for 3 months in London. J is then asked to work in succession for B Ltd and C Ltd for 6 months (in respectively Birmingham and Manchester) before transferring to work for D Ltd on a permanent basis back in London ABCD Services Ltd clearly supplies workers to the group so passes through the initial gateway tests. The services are personal and J is subject to SDC. Should J be able to claim travel and subsistence tax relief? Ignoring the current proposals, we think as a matter of fairness the answer should be yes in respect of the engagements with B Ltd and C Ltd. Would the answer still be yes under these proposals? Hopefully so but if not the proposals are flawed and would require tweaking before the Government proceeds further Now consider C who is not an employee of ABCD Services Ltd but who works for an umbrella company or has his own PSC. C does the same job as J and, coincidentally, has exactly the same work pattern with the group companies. Would C get tax relief under the current proposals? We think not. Should C get relief? As a matter of fairness and maintaining a level playing field why shouldn t he? 4.26 The above examples illustrate that there are situations where the new rules could be tougher than the general travel and subsistence rules that apply where there is a single employment and no outside employment intermediary. Hence, as noted above, we think the proposed legislative framework will need trialling before being introduced. P/tech/subsfinal/ET/2015 6

7 5 Response to questions Do you agree that the structure of the proposed legislative changes will achieve the policy objectives? 5.2 Broadly, yes. But subject to addressing anomalous situations as described above and generally ensuring that the measure is appropriately targeted Will there be any consequential difficulties in administrating each engagement as a separate employment? 5.4 We believe that, subject to clear definitions and appropriate guidance as to the meaning of a number of key terms, it will be the determining of whether SDC exists that will be the principle difficulty in administering the new rules. 5.5 In terms of treating each engagement as a separate contract, the issue will be when one contract stops and another starts. For example, if a worker undertakes work for the same engager but at different locations, is that one contract or two? Similarly as regards work for two engagers at two different locations Are there any particular professions who will be significantly affected by these proposals? 5.7 Undoubtedly some professions will be significantly affected by these proposals, eg those that commonly use service companies. The issue will be defining which companies are involved substantially or mainly in the supply of labour. Additionally it may not simply be the professions that are impacted but also say those who provide services (and labour?) under third-party outsourcing contracts Will these changes result in a significant shift in the way those affected are employed? If so, what would this shift be and what would be the impact for the workers concerned? 5.9 From a tax perspective there could be a behavioural shift as it would lessen the benefits of umbrella companies and PSCs, although their non-tax benefits (eg avoiding the creation of employment rights with engagers) would remain. Potentially lower paid employees may then receive less pay as there is no tax and NIC saving to pass on (a point noted in the Summary of Impacts on page 20) One unintended consequence could be more lower-paid workers taken on as employees but on zero hours contracts Would the definition of employment intermediary as proposed cause any practical difficulties? Please provide details and examples As illustrated above, the definition of an employment intermediary would need to be very precisely worded in order to sort the sheep from the goats. The definition will need to address what companies do (provision of labour or provision of services), what are personal services, group service companies, outsourcing companies (where employees are TUPE d across and whether they are then working for an employment intermediary but may swap locations over time), etc. P/tech/subsfinal/ET/2015 7

8 5.13 For example, where a large company outsources its canteen/catering service and a canteen employee is then moved to work at/for another large company, should the catering company be treated as an employment intermediary and the employee s transfer as a new contract? We think not. Similar points arise where security services are outsourced and the worker moves between clients Additionally, we do not think it would be fair / right that where a professional services company contracts with a PSC to provide specialist on-site IT services to an end client in respect of, say, an 8 week project (and where SDC applies) then the worker gets no relief for home-to-temporary workplace travel and subsistence expenses incurred in that time. The comparison being to an employee of the company itself doing the work where relief would apply Do you agree with the definition of the terms supervision, direction and control and will these definitions cause any practical or commercial difficulties? If so, what will these difficulties be? 5.16 As described above the practical and commercial difficulties that arise with the definition of SDC are the same as those experienced in relation to the test under Section 44 ITEPA and the agency rules. We already have 17 pages of HMRC guidance to deal with three words yet we still do not think that those 17 pages are providing the clarity required to easily and consistently decide whether SDC exists Which option for a transfer of liability would work best to ensure future compliance, Option 1 or 2? Option 2. As noted above the responsibility for advising or ascertaining whether SDC exists should follow the existing transfer of debt rules that apply in relation to Section 44. Liability should only transfer to the engager where the engager has misled the intermediary as regards SDC. The engager should not be on the hook if the intermediary has received/obtained correct information from the engager but then ignored the tax relief rules. 6 The Chartered Institute of Taxation 6.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. P/tech/subsfinal/ET/2015 8

9 The CIOT s 17,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 5 October 2015 P/tech/subsfinal/ET/2015 9