This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

The Recruitment Industry and the 2016 T&S Expenses Draft Legislation
Bridget Wood
18 December 2015

The Recruitment Industry and the 2016 T&S Expenses Draft Legislation

As announced in the 2015 Autumn Statement, on 9 December 2015 the government published legislation in the draft Finance Act 2016 to change certain rules on travel and subsistence expenses. If enacted as drafted, this legislation will prevent many workers engaged through an employment intermediary, such as a recruitment company, an umbrella company or a personal service company (PSC), from claiming tax free reimbursement of home-to-work travel and subsistence expenses. The draft legislation is much as anticipated, but with a reprieve of sorts for PSCs.

Proposed changes to the law

Currently, workers engaged through an employment intermediary are able to claim tax relief and a disregard for National Insurance contributions (NICs) on travel and subsistence expenses relating to journeys from home to work. This applies to assignments of less than 24 months at what are regarded as 'temporary workplaces'. If the legislation is introduced as drafted, many of these workers will be considered to be travelling to a permanent workplace, and so will no longer receive this tax free reimbursement. The new rules will apply where:

  • the worker personally provides services to a client (which are not services provided wholly in the client's home); and
  • the services are provided not under a contract directly between the client and the worker, but under arrangements involving an employment intermediary.

This will be the case unless 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.

IR35 Contractors

Different rules will apply to workers who personally provide services via a PSC and pay deemed employment income tax within the IR35 tax regime. These workers will no longer be able to claim tax relief or a NICs disregard on home-to-work travel and subsistence expenses, but the supervision, direction or control test under the proposed new legislation will not be used.

Assignments outside IR35 where the worker is self-employed will not be affected by the new legislation. This is good news for the recruitment industry and contractor community because the assumption of supervision, direction or control will not have to be dispelled in order for workers providing services via PSCs outside IR35 to be able to continue to claim reimbursement of travel and subsistence expenses tax free.

Tax debt transfer

The draft tax debt transfer provisions offer more good news for the recruitment industry. Although employment intermediaries are protected by debt transfer provisions, these apply in very limited circumstances. If the end user client, or a recruitment company, provides the employment intermediary with a fraudulent document that is intended to constitute evidence that the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control and the employment intermediary relies on this evidence to reimburse tax free home-to-work travel and subsistence expenses, the provider of the fraudulent document must account to HMRC for the unpaid tax. On the face of it, this seems helpful to employment intermediaries. However, fraudulent intent is very difficult to prove. In addition, given that such a statement is not required in relation to PSC workers and that most umbrella workers do work under someone's supervision, direction or control, cases where the debt transfer provisions will assist the employment intermediary seem likely to be rare.

Although chiefly good news, the debt transfer provisions do create a potential downside for the recruitment industry. Except where the IR35 tax regime applies, evidence of a lack of supervision, direction or control is needed in order for a worker to obtain tax free reimbursement of the expenses. However, end user clients, unless they are very certain, may be reluctant to provide such evidence because they will fear falling foul of the tax debt transfer provisions.

Personal liability of directors

Directors may incur personal liability for unpaid tax on home-to-work travel and subsistence expenses. If an employment intermediary fails to pay the tax by the due date, the directors of the employment intermediary could be made personally liable. HMRC could also require the directors of the employment intermediary to pay the tax where the employment intermediary did not do so because there was no supervision, direction or control of the worker, but it was not provided with evidence showing this from any other person in the supply chain. The directors of the end user client or recruitment company to which a tax debt was transferred by virtue of the relevant entity's provision of a fraudulent document evidencing a lack of supervision, direction or control could incur liability for the unpaid tax, as could the director of a PSC within IR35.

Definition of 'Employment Intermediary'

The entity which has the primary obligation to comply with the new legislation is the employment intermediary. An "employment intermediary" is defined in the draft legislation as "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". The documentation accompanying the draft legislation states that an employment intermediary would include an umbrella company, a PSC or a recruitment company. It is of note that this summer's Consultation Document on the proposals suggested that an employment intermediary would be defined as a business "substantially in the supply of labour services" and provided the reassurance that "as such the definition will not include professional service firms that second staff to clients, as their business is not primarily in the supply of labour". However, neither the word "substantially" nor "mainly" or "primarily" (other words which are used in this context in the Consultation Document) are included in the draft definition of "employment intermediary". Is this an intentional omission designed to ensure that HMRC has the ability to crack down more widely in this area?


The closing date for comment on the travel and subsistence expenses sections of the draft Finance Act 2016 is Wednesday 3 February 2016. The sections in their final form will come into force on 6 April 2016.

Action to be taken

Recruitment companies should consider the potential impact of the removal of home-to-work travel and subsistence expenses tax relief on the finances of the workers whose services they supply and, if necessary, start educating their clients and preparing them for likely rate increases.

For a number of reasons, recruitment companies should resist any temptation to encourage workers to provide services via PSCs outside IR35. The draft legislation contains anti-avoidance provisions. In addition, such encouragement may fall foul of the managed services company legislation with the risk of tax debt transfer. Current reporting requirements mean that HMRC will spot a sudden increase in the use of PSCs and clamp down hard, particularly if employees of umbrella companies are transferred to outside IR35 engagements via PSCs. In any event, the reprieve for PSC contractors operating outside IR35 may be short-lived. To find out, we must wait for the government's response to this summer's Discussion Document about improving the effectiveness of IR35. In addition, it is not all roses for PSC contractors outside IR35. These contractors will be hit by changes to the dividend taxation rules which come into effect in April 2016.

Providers of outsourced services would be wise to ensure that service descriptions and pricing in contracts they issue to clients are not drafted in such a way as to make them look like a labour supplier and hence an "employment intermediary" under the new travel and subsistence expenses legislation. For example, a contract may, on the face of it, be for the provision of IT consultancy services, but pricing schedules often provide that the fees for the services are calculated on the basis of the provision of named individual IT consultants with particular skill sets at their day rates. Where this is the case, could the IT services provider be considered to be carrying on "a business of supplying labour"? To reduce risk, outsourced service providers should avoid time and materials consultancy contracts, or at least refrain from describing the services as, and relating the fees to, the provision of consultants. Where possible, the safest route would be to contract on a project basis with fixed prices for the provision of pre-defined deliverables.