Limited company contractors not caught by IR35 can continue to claim travel and subsistence tax relief, confirms the draft Finance Bill 2016.
However, deputy director of policy at the Association of Independent Professionals and the Self Employed (IPSE) Andy Chamberlain believes this means HMRC will be using IR35 reform to tighten-up the rules.
“The Government is intent on looking at this area, and the fact that IR35 doesn’t feature in the Draft Finance Bill suggests that they are simply giving their proposals further consideration,” Chamberlain warns.
“When the IR35 proposals do come through, we’re sure that they will likely make the regime more difficult for legitimate businesses to satisfy. We’re positive that there will be changes coming, and when they do, IPSE will be reviewing them very closely and feeding back to the Government.”
HMRC accompanied the announcement within the draft Finance Bill with the release of a summary of responses following the consultation into Employment Intermediaries and Tax Relief for Travel and Subsistence, which was published during the Summer Budget.
PSC simplification makes IR35 outcome more important
Whilst the Government has decided to press on with its proposal to deny travel and subsistence relief to contractors who are either caught by IR35 or deemed to be under supervision, direction or control (SDC), contractors operating through personal service companies (PSCs) who are outside of IR35 will not be subject to an SDC test.
This comes after the Government’s acknowledgement that it would be overly burdensome for a PSC contractor to have to consider two tests for each engagement undertaken.
As a result, HMRC has amended its proposals so that the measures only apply to a PSC contractor’s contract when it falls within IR35, meaning contractors operating through PSCs won’t have to separately consider whether their engagement is under SDC.
Whilst Chamberlain approves of the application of a single test to determine both outcomes, he notes that it makes it all the more important that HMRC makes the right call regarding IR35:
“It means that tax relief will from now on only be available to contractors outside of IR35, which is fine, but of course it now all depends on what the Government decides to do regarding IR35.
“If the Government imposes a test which is too difficult for legitimate businesses to satisfy, not only will these businesses be hit with a bigger tax bill than they should be, but it also means they will be unable to claim the tax relief to which they’re entitled.”
SDC test to remain
The ambiguity surrounding the use of the SDC test was a cause of contention amongst many of contracting’s stakeholders, most of whom argued that the test is too subjective and not sufficiently clear, as highlighted within the summary of responses.
Meanwhile, contracting bodies also criticised the proposal to make the end-client responsible for determining whether or not the contractor is under SDC, claiming that many would be unlikely to agree that the contractor was not subject to SDC because of the potential risk that HMRC would disagree with their decision.
However, HMRC has decided to push ahead with the use of SDC to determine travel and subsistence status, claiming that the test will be clear enough to use, as long as the appropriate guidance is provided, which it claims it will work with stakeholders to develop.
Further confirmations prompt concerns
Other announcements made within the draft Finance Bill, though expected, have been less than warmly welcomed by the contractor community.
The Institute of Chartered Accountants in England and Wales (ICAEW) recently criticised the Government’s Autumn Statement proposal to request quarterly online tax returns from contractors by the year 2020, claiming it would prove to be an “additional burden”.
These views have been mirrored by Chamberlain and IPSE: “The digital tax account proposal is quite a major change. We are concerned about the impact that it might have, and we’re seeking more information and trying to draw up a picture of how burdensome it is likely to be for contractors.”
Meanwhile, the looming dividend tax changes – which the Finance Bill has confirmed will come into effect on April 6 – also pose a significant concern for contracting bodies and contractors alike.
“The Government has not consulted on this measure. It’s a straightforward tax hike without consultation and IPSE believes it is set to place yet more pressure on the smallest businesses,” Chamberlain concludes.