Proposed changes to IR35
In the run up to the Autumn Statement, there were press leaks about proposed changes to IR35 purportedly made by the Treasury. It was suggested that the IR35 tax legislation might be amended so that contractors who work for one client for more than a month will be deemed employees within IR35 and therefore subject to PAYE income tax and NICs on their fees, unless it can be shown that the manner in which they provide the services is not subject to (or to a right of) supervision, direction or control. However the much anticipated announcements did not come to pass in George Osborne's Statement.
The recruitment industry and contractor community can only hope that the leaks were designed to gauge reactions to the proposed changes. So is no news good news? Will there now be a full consultation on changes to IR35 or watered down proposals? It is likely that we will need to wait for the outcome of HMRC's analysis of the feedback received on the IR35 Discussion Document (published in the Summer and closed for comments at the end of September) for more information.
Proposals to remove tax relief on travel and subsistence expenses
The Autumn Statement confirmed that "the government will legislate to restrict tax relief for travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company or a personal service company". Those who are genuinely self-employed and provide services outside IR35 will not be affected. The change will take effect from 6 April 2016. However, the Statement did not go into any more detail than this. We will probably have to wait for the response to the consultation or draft legislation, expected to be published on 9 December 2015, to find out which elements of the proposals contained in HMRC's July 2015 Consultation Document are likely to become law.
By way of a reminder of the background, HMRC published a Consultation Document in July 2015 containing proposals to remove home-to-work travel and subsistence tax relief where:
- a worker is supplying personal services;
- he or she is engaged through an employment intermediary (such as a recruitment company, umbrella company or personal service company); and
- it cannot be shown that the manner in which the services are provided is not subject to (or to the right of) the supervision, direction or control of any person.
The Consultation Document puts forward the proposal that it will be the engager's responsibility to confirm with the employment intermediary whether there will be a right of supervision, direction or control of the worker. It is currently unclear whether "engager" could include a recruitment company as well as the end user client, The Consultation Document also proposes the potential for tax and NICs debt transfer to the engager in cases of non-compliance. If either of the proposals become law, engagers are likely to err on the side of caution for all but the most clear-cut assignments and confirm that there will be supervision, direction or control of the worker. That is if they do not give up engaging workers via intermediaries altogether because it becomes too burdensome.
Action to be taken
Recruitment companies should, as always, ensure that contracts with contractors and clients reflect reality. If the manner in which contractors provide services is not subject to (or to a right of) supervision, direction or control, make sure that contracts do not say this. For example, beware of signing client-imposed standard contracts which contain clauses, probably originally intended to protect the client from potential employment claims, stating that the recruitment company and not the client is responsible for the supervision, direction and control of contractors supplied.
Although we do not yet know what the legislation will say, 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.