As discussed in our February article, ‘What are HMRC changing in legislation for Travel and Subsistence?’, from 6 April 2016, the government have decided to bring in legislation that will affect our expanding temporary workforce in the United Kingdom. In the Cloud9 Umbrella/K&B Accountancy Group offices, we are finding that many contractors are still in the dark regarding the forthcoming changes. Hopefully, this article will help our clients enter the new world of contracting ahead and feel clearer in what is to change for contractors.
Finance Act 2015
Last year, the Finance Act 2015 saw the introduction of Section 289A, which from April 2016, excludes expenses paid via a salary sacrifice arrangement. As most umbrella payroll providers currently deemed as a salary sacrifice model, they will no longer be able to offset expenses (with the potential exception of mileage) on an on-going basis as tax relief for their contractors. Therefore, all eligible expenses will have to be declared at the end of the tax year via self-assessment or P87, instead of receiving them at source on a weekly/monthly basis.
Supervision, Direction or Control
Alongside this, there is also the addition of HMRC’s ‘Supervision, Direction or Control’ (SDC) tests from 6 April, that will prohibit contractors working through an intermediary claiming Travel and Subsistence expenses, should they fall under SDC (either through their working practises or the mere contractual right to exert SDC). HMRC are yet to provide guidelines for the testing of SDC and we cannot speculate what they will accept as proof until 16 March, and we are hoping that they release more information within the final budget. The restrictions on Travel and Subsistence will also affect you if you are running your own limited company, and fall inside IR35. You will not be affected if you are outside of IR35.
HMRC have confirmed that if claims for tax relief are carried out with false evidence, the debt transfer can affect anyone within the supply chain who supplied the fraudulent documents.
There are a number of intermediaries already offering different solutions to counteract this new legislation. Although we can’t comment on how these various ‘schemes’ may operate in practice – be aware of MSC legislation (Managed Service Companies). If the provider manages all the administrative components of running a Personal Service Company (PSC), MSC legislation may be triggered. Initially, for providers to mass transfer all PAYE contractors across to a limited solution, this will seem appealing. However, as each contractor will be paid as if they are inside IR35, does it really offer much of a benefit? What if the agency/client doesn’t want to work with this particular model? How about other additional responsibilities as a company director (please see our blog article posted last week). You may also struggle in moving your PSC to another provider with a ‘fully managed’ structure.
Some of the changes above sound daunting but do not fear! If you currently claim few expenses or none at all, you may only notice a small decrease in your take-home pay after April, if any. An umbrella solution will remain a practical and viable option for first-time contractors, and contractors who do not want to fuss with the administrative aspects of a PSC.
If you do incur significant business expenses, have a consultation with a specialist contractor accountant and establish whether operating a limited company is the best option for you. Be aware of your IR35 status, as there may be penalties should you be incorrectly claiming tax relief.
We are entering a ‘new world’ for contractors, and this could be an exciting opportunity to assess your current payroll provider and find one that is most suited to your requirements. Don’t feel pressured into a solution that may not be practical, and be confident that your provider or accountant can give impartial, professional and transparent advice. There is no need for a mass exodus from one solution to another because tried and tested service providers will continue to operate compliantly.
Please don’t hesitate to give us a call on 0207 078 0212 and have a free consultation with one of our industry experts, to see whether Umbrella or PSC is right for you. As soon as more information is made available, we will continue to keep you updated.