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Markel Tax

13 Feb 2019

The new draft legislation is finally here! Is it the end for Umbrellas?

The draft legislation inserts new provisions into the expenses legislation (at s339).  For those of you au fait with s44 ITEPA (2003) you will be familiar with the new legislative provisions, in fact for all intents and purposes they are identical.

Before considering the new legislation it is worth briefly recapping the current expenses legislation.  Under the current expenses legislation ss336-339 ITEPA provide that an individual may be reimbursed travel and subsistence expenses tax free to and from a temporary workplace providing:

A) The individual has reasonable expectation of further work with the same employer at a different site, and
B) The individual reasonably expects he will not remain at that site for a period of more than 24 months.

The new s339A provides:

(1) This section applies where an individual ("the worker")—

(a) personally provides services (which are not excluded services) to another person ("the client"), and
(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving an employment intermediary….
(4) Where this section applies, each engagement is for the purposes of sections 338 and 339 to be regarded as a separate employment.

The effect of this is that every time an employee undertakes a new assignment each assignment will be treated, for travel expenses purposes, as a separate and distinct ring-fenced employment.  

This displaces test "A" above as the employee, in essence, has no over-riding continued employment existing in between assignments.

In simple terms the legislation is treating each assignment as a permanent workplace and any expenses incurred are simply treated as ordinary commuting.

The legislation itself does however also provide (as seen in s44) an exemption which states:

(2) But this section does not apply if it is shown that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control by any person.

This means that if it can be shown that an individual is not subject to, or a right of, supervision, direction or control as to the manner in which the services are provided the individual is capable of receiving tax free reimbursement of expenses.

For all practical purposes this brings umbrella companies under the same test as companies engaging self-employed individuals where s44 is applicable.

Transfer of Liability

The legislation, much like s44, provides its own transfer of liability.  It grants the power to transfer liability from the employment intermediary to the director of the employment intermediary and provides the same "fraudulent document" defence - in other words the employment intermediary will not be held liable if the client/agency fraudulently confirmed a lack of SDC and the umbrella company relied on that in good faith.

The explanatory notes confirm these provisions will only apply where a limited company is operating within IR35. 

Considerations and Impact

1. The legislation only applies where an employment intermediary is in the chain.  Per the legislation employment intermediary is defined as:

"employment intermediary" means a person, other than the worker or the client, who carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour;

As with s44, where an agency (whose business is the supply of people) is in the chain then the legislation automatically comes into play and one must consider SDC. 

It follows, however, that if there is no agency in the chain, and the umbrella company is operating correctly as a provider of services (eg construction services, teaching services, driving services etc) then one does not necessarily have to automatically consider this legislation and the pre-requisite of an "employment intermediary" is not present.

2. It is fundamentally important to recognise that the expenses legislation has not been replaced.  This means that even if it can be demonstrated that there is a lack of SDC you must still comply with the existing expenses legislation, employer responsibilities and checks and control in order to reimburse expenses tax free and stay free from liability.

3.When the S44 changes came into force in 2014 understandably some agencies decided it was too risky to engage self-employed individuals through third party companies as they may be held liable if it could not be shown there was a lack of SDC.  This led many to convert to an umbrella company set up. 

This legislation essentially levels the playing field between umbrella company set up and commercial contracting/self-employed set up (ie in order for it to be beneficial to all parties and risk free a lack of SDC must be demonstrable regardless of whether the individual is engaged as self-employed or through and umbrella company). 

In other words if a lack of SDC can be demonstrated then either Umbrella or S/E structure can be utilised, and if SDC cannot be demonstrated then neither can be utilised compliantly.

4. Following on from the above, just what is going to happen to all those individuals who are not free from SDC where there is an employment intermediary?

i) Limited company is unlikely to be an option as if they are subject to SDC then likely income levels make a limited company not a reasonable option, and the likelihood of IR35 applying is undoubtedly increased.

ii) The "hybrid" contract with expenses is ruled out entirely under this legislation.

iii) The "S44 in" contract whereby individuals are registered self-employed , PAYE and NI is deducted at source but without expenses reimbursed is still an option, however there is scope HMRC may try to challenge a SA Return claim for expenses from a subcontractor who falls within the scope of this legislation.

iv) direct engagement by agencies or outsourced payroll is an option providing agencies do not reimburse expenses.

There will undoubtedly be many new "models" cropping up over the next few months however we would advise all umbrella companies to be very wary of "too good to be true" schemes and always seek specialist advice.

Our advice to umbrellas at the moment is to look to your workforce.  Distinguish between contracts which have a definite employment intermediary and those which don't, and where an employment intermediary is in the chain undertake a SDC analysis on all individuals.

Finally it should be noted that this is still draft legislation, the legislation and notes can be found below and we will welcome any and all comments to add to our response.

Next article in series

13 Feb 2019

VAT registration threshold: call for evidence

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