Umbrella company contractors who may have been tempted to trade via a limited company within their umbrella’s supply chain to claim travel and subsistence (T&S) expenses tax relief are no longer able to do so.
This is because of final amendments made to the Finance Bill 2016 prior to its implementation on 6 April 2016 which prevent what is considered to be inappropriate use of personal service companies (PSCs) within the supply chain, after earlier draft legislation had exposed a loophole.
Changes to T&S and the resulting liability that rests with umbrella companies have meant some firms have considered adopting risky operating models to let them continue processing contractor expenses. Other umbrella companies have stopped offering T&S altogether, deeming the risk to outweigh the reward.
Fortunately, SDC Testing eliminates the financial risk and administrative burden for umbrella companies whilst allowing them to continue processing contractor expenses. The new solution, developed by Contractor Calculator and Qdos, ensures that umbrella companies can maintain their competitive edge without resorting to models that linger on the edge of compliance.
“SDC Testing is the safest compliance solution on the market, allowing umbrellas to swiftly and accurately determine which contractors qualify for T&S, with the option to insure those who do,” highlights Contractor Calculator CEO Dave Chaplin.
Changes to T&S – explained
Following legislative changes introduced in April 2016, contractors who are employed via an intermediary and considered to be under the ‘supervision, direction or control’ (SDC) of anybody else within the supply chain no longer qualify for T&S expenses tax relief.
Notably, HMRC legislation refers to SDC applying ‘as to the manner’ [ESM2055] in which the contractor works. This implies that a contractor can be subject to supervision to some extent, provided nobody has the right to give them detailed instructions as to how to carry out a task or to move them onto other tasks not originally agreed in the contract.
One concern is that HMRC guidelines note that the intermediary – or umbrella company – must prove that the contractor isn’t subject to SDC before they can compliantly process their expenses. However, HMRC doesn’t highlight what evidence it will consider to be persuasive.
Experts have suggested that being able to demonstrate due diligence is likely to mean an umbrella will avoid extensive HMRC investigations. However, the perceived compliance burden has acted as a deterrent for many firms who would otherwise have processed expenses. Other umbrellas have considered ways to sidestep the legislation.
Umbrella contractors can’t incorporate to claim relief
One loophole that was evident following the original draft legislation of the Finance Bill 2016 concerned umbrella contractors trading via their own PSCs. Prior to the amendments, the wording in the legislation indicated that contractors who traded via a PSC and who were outside of IR35 were exempt from the T&S restrictions.
As a result, umbrella companies would have been able to push contractors who were outside of IR35 into PSCs and resume operations as usual. This would have meant continuing to process the T&S expenses of limited company contractors on their books, even if they were under SDC.
However, the updated regulations state: ‘Even if the companies pay all of their remuneration through Pay As You Earn (PAYE), if the company is controlled by a managed service provider (MSP) they are caught by the T&S legislation’.
Umbrella companies fit the mould of an MSP, and so cannot seek to incorporate contractors. SDC Testing offers a simple solution that means umbrellas can continue to offer T&S to contractors without flirting with non-compliance.
SDC Testing: How does it work?
The new online SDC testing tool enables umbrella companies to quickly and efficiently process thousands of contractors to determine their SDC status. SDC Testing also offers underwritten insurance for contractors whose expenses are processed. This provides protection to both the umbrella company and the agency against a negative judgment by HMRC.
After registering with SDC Testing, the umbrella company can invite contractors to take its automated compliance test, composed of over 50 questions. SDC Testing then sends emails out to the contractors, asking them to complete the test. A bespoke algorithm based on expert knowledge of tax and employment legislation and case law is then used to analyse each contractor’s answers.
The contractor receives an assessment, consisting of a risk profile and compliance recommendations. The umbrella company will use this to determine whether or not to process the contractor’s expenses.
For complete protection, umbrella companies can also insure contractors whose expenses they choose to process. The insurance package includes protection against a negative judgment in the instance of a HMRC investigation, as well as a rigorous tax defence.
SDC Testing: What are the benefits?
Through its combined test and insurance offering, SDC Testing is the only available solution that provides umbrellas with all-round protection. It also sidesteps excessive administrative duties and significant overheads that would have to be considered when carrying out resource intensive manual testing.
Umbrella companies can effectively outsource their entire compliance procedure with SDC Testing’s fully automated solution, meaning guaranteed compliance with minimum effort.
Umbrella companies who are able to continue processing T&S expenses in a compliant manner maintain a competitive edge in the market, whilst contractors can continue to claim the relief that they deserve.
Firms can also integrate their systems with this solution via an API, enabling them to reduce their workload further by integrating back office systems.
SDC Testing: Security of data
SDC testing’s system is created in the cloud on the secure platform Amazon Web Services AWS, which is used by many major blue chip companies such as Netflix. All data is backed up and fully retrievable at a later date.
The tool also includes a ‘Candidate Privacy Option’ for umbrellas who don’t wish to share their contractor’s details. This means umbrella companies can import thousands of contractors using only a unique worker reference. Each contractor will then have a unique test link, which umbrella firms can distribute using their own systems.
Firms that do enter the workers email into the SDC Testing tool can also take advantage of the automatic emailing of tests and reports to their workers.
If you are a contractor, please ask your umbrella company to contact the SDC Testing team to discuss how they can use the system so you can continue to claim expenses. Alternatively, if you are an umbrella company looking for a safe, cost-effective method of processing SDC compliance for all your workers, please get in touch.