Contractor umbrella and personal service company (PSC) tax relief restrictions announced in the 2015 Budget may never happen, despite the promises by government and its ministers.
It is very likely that, because it looks like the solution HMRC is proposing will depend on employment status rules, any proposed measures will be unworkable. We will be left with another ‘income shifting’ scenario. The initiative will quietly wither and die.
HMRC’s initial proposals, and admittedly this is very early days, appear to be along the lines that workers who are subject to supervision, direction and control (SDC) of a third party will not be able to claim tax relief on their travel and subsistence expenses. Both umbrella company contractors and those using PSCs are to be within scope.
Supervision, direction and control. Three simple words but requiring an understanding of decades of subjective case law required to make a judgement. It is for this reason that IR35 is unenforceable and continues to cause such uncertainty for contractors.
Furthermore, although umbrella companies can be categorised with a legal definition, PSCs are not. So, is HMRC proposing that an entrepreneur who starts a business, travels up and down the country, wins a single first client – this is all very common – then can’t claim any tax relief on travel and subsistence expenses?
How do you legally differentiate between an entrepreneur who is the single director and shareholder of their limited company and with a single client supplying their services at their client’s location, and a contractor based onsite?
You could try using supervision, direction and control but we come back again to IR35 and how it has become largely unenforceable. We come full circle to the whole issue of employment status and how to tell if someone is genuinely self-employed or in business on their own account.
The Office of Tax Simplification’s (OTS) excellent Employment Status Report wryly states in its Foreword that: “Employment status is a complex and wide-ranging subject that many have said has no real solution – and that if we did manage to ‘solve it’, we should immediately move on to world peace as we’d clearly be on a roll.”
The report goes on to say that no other country has satisfactorily solved the problem of employment status, either. So, surely we are not going to see more unenforceable rules just like IR35 becoming law?
Can HMRC and the government not see that umbrellas are a highly efficient tax gathering machine and that dispersing hundreds of thousands of contractors into PSCs will reduce tax take, not increase it? The Freelancer and Contractor Services Association proved this almost beyond doubt in its presentation to MPs at the Houses of Parliament.
If the decision to take action was based on common sense and the facts, then you could bet your mortgage on the abolition of tax relief on travel and subsistence expenses for umbrella and PSC contractors never happening.
However, as with the retention of IR35 which remains in force despite overwhelming evidence that it does not work, the decision won’t be based on common sense and reason. It will be based on politics and media pressure, and since when have either of these drivers resulted in well thought through and effective legislation?