Following proposed restrictions to tax relief on travel and subsistence expenses for workers engaged through intermediaries, draft legislation has been included in the Finance Bill 2016 and will come into force on 6 April 2016.
Proposed changes and implications
The proposed measures aim to prevent workers employed through an intermediary from claiming tax relief on the expenses they incur commuting. Workers who have a more traditional employment relationship are not able to claim similar relief for such expenses, thus creating inequality.
When does the legislation apply?
The draft legislation aims to remove tax relief on travel and subsistence expenses relating to commuting where a worker personally provides services to another person and the services are provided under arrangements involving an employment intermediary.
The legislation will not apply if it can be shown that the services the worker provides are not subject to supervision, direction or control.
During the consultation the concern was that many people would have difficulty understanding and applying the legislation, however, the Government has decided to retain it in the draft legislation under the proviso that the existing guidance will be reviewed. Further guidance is expected ahead of 6 April 2016.
As it would be overly complicated for personal service companies to apply both tests included in this legislation effectively (being the application of the tax intermediaries legislation (IR35) and the tests set out in this new legislation), engagements which fall within IR35 will automatically fall within these rules. This is unlikely to have a material effect in practice as proving that work is taken without supervision will be would be difficult.
Transfer of liability
Like the tax agency worker legislation, the draft legislation will effectively transfer the PAYE obligations to third parties where they have provided an employment intermediary with a fraudulent document claiming that the worker is not subject to supervision. In an attempt to increase compliance and support enforcement of the new rules, the draft legislation allows recovery of the amounts due under PAYE from the directors the employment intermediary and the third parties.
A recovery can be made where an employment intermediary doesn’t have evidence to support that the legislation doesn’t apply due to a lack of supervision, direction and control. This means that employment intermediaries should ensure that they obtain and retain supporting evidence and third parties who provide it ensure that it is appropriately verified and accurate so that they don’t have any liability transferred to them.
Summary of restrictions on tax relief on travel and subsistence
Employment intermediaries and end-user clients will need to understand the relevant tests which determine whether the new legislation will apply, and in particular whether a worker is subject to supervision, direction or control.
End-user clients should be aware that if they provide an employment intermediary with fraudulent documentation which results in the employment intermediary not applying the new legislation in circumstances where it would otherwise have applied, the resulting PAYE liabilities will transfer to them.
Directors and officers of employment intermediaries should ensure that if the employment intermediary does not apply the new legislation to a particular engagement that they have appropriate third party evidence to support this position, otherwise they can become personally liable for any unpaid PAYE liabilities.