I’ve heard that travel and subsistence expenses are changing?

In summer 2015 HMRC held a consultation on Employment Intermediaries and Tax Relief for Travel and Subsistence. This dry sounding title was enough to strike fear into many hearts. The consultation was looking at who should be eligible for travel and subsistence expenses, focusing those who are employed through an intermediary such an agency, umbrella company or limited company. The changes do not affect sole traders or employees.

scared man travel and subsistence

Why does this matter to me?

One of the groups affected by the potential changes is personal service companies (PSC); a small, often sole director – sole shareholder, limited company providing consultancy-type services, usually on a contract basis. In this case the intermediary employing them is their own limited company. In many cases it is the agency or ultimate client who requested that they work via a limited company.

If you are currently working via a personal services company (PSC) then you have probably been used to claiming all of your travel and subsistence to the client work place for up to 24 months at a time.

Why did HMRC want to change things?

HMRC are attempting to even up a current discrepancy in what can be claimed for travel and subsistence. As I have discussed before on this blog, travel and subsistence is a bit of a can of worms. One of the fixed principles however, is that no one can claim for their normal commute. Whether employed, self employed or a director of a limited company, you cannot claim travel and subsistence expenses for your basic journey between home and work.

The problem is, if you are working through a PSC, your permanent workplace is generally your home. This means that while you are on a client job or project this counts as a temporary workplace and you can claim the journey as an expense. HMRC argued that people are often working for the same end company for months, even years. If you were employed you would not be able to claim any expenses for that journey, but if you are operating via an agency or PSC then you can claim both the journey and some elements of subsistence. In the consultation HMRC were trying to decide whether this was unfair in comparison to people who are employed / self employed and therefore what should be done about it.

What were people scared about?

Initially it looked like HMRC was going to get rid of the travel and subsistence for anyone who:

personally provides services to another person
is operating through an intermediary
and is under supervision, direction and control of another person in the manner in which they undertake their work.

This was scary because it would have affected lots of very small PSC, which were really not the target of the legislation. HMRC was aiming for the bigger fish of umbrella companies and agencies, but the knock-on effect would have been wider.  For many people this would have a substantial financial impact and would also influenced the choice of future projects.

What was decided?

After the consultation, HMRC decided to change tack slightly. PSC are only included if they fall within scope of IR35. If this is the case then the criteria above about working under supervision, direct and control will still apply.

How do you know if you are within scope of IR35?

This is another kettle of fish altogether. IR35 is the tax legislation designed to capture “disguised employees”, that is individuals operating through personal service companies who are treated and act like employees but get the tax benefits of being self employed. You will know if you are currently working within IR35 as you will be making deemed employment payments covering tax and NIC via your limited company payroll or your client will be paying you via PAYE.

If you are not currently within IR35, whether you should be is another question and not a simple one. The decision is based around whether you are an “office holder”; whether you’d be regarded as an office-holder of the client if you provided your services under a contract directly between you and the client. It depends on your specific contract and engagement on a job by job basis. HMRC do have an employment status tool to help give an indication. 

What does this mean for me?

If you are caught within IR35 and personally provide services to another person, operate through an intermediary and are under supervision, direction and control of another person in the manner in which they undertake their work, then you can’t claim you travel and subsistence expenses to your workplace. You are treated as if you are an employee. There are still various expenses you can claim under IR35, but they are not the same as if you were self employed. 

If you work through a PSC but are not currently within IR35, then you can still continue to claim your travel and subsistence as previously. There is no change for you at the moment.

The future

These particular changes should become part of the 2016 Finance Bill and are likely to come into force in April 2016. However, this whole area still seems to be a bit of a moveable feast. There is an currently an ongoing effort by HMRC to reduce the tax benefits for limited company directors and even up tax between the various employment statuses. The focus on travel and subsistence for intermediaries is part of that wider effort. The travel and subsistence expense rules were never been straightforward in the first place, with differences depending on whether you are employed or self employed. As a result there may well be additions, clarifications or more change in the future.

UPDATE – The proposed changes did come into force but whether they apply depends on whether you fall within IR35. Determining your employment status is still grey area particularly around the definition of supervision, direction and control. One major change is that from 6 April 2017 public sector organisations have the responsibility for determining employment status of their contractors and applying the necessary measures. Expect more updates and change!

Summary

If you are a sole trader or employee, this does not affect you at all.
If you are a personal services company within IR35 you are most likely going to lose a big chunk of your travel and subsistence expenses from April 2016.
If you are a personal services company outside IR35 there is no change (for now).
Expect more change in the future.