This document provides helpful guidance on PSA completion matters (this is a 2016 updated version of ET4Bs earlier PSA guidance document)
This document provides helpful guidance on PSA completion matters (this is a 2016 updated version of ET4Bs earlier PSA guidance document)
On 9 December 2015 HMRC published its detailed proposals and draft PAYE legislation (with equivalent NIC legislation to follow), which would place significant limits on expenses claims made by workers paid though employment agencies and similar structures. The proposals are expected to take effect from 6 April 2016.
How does the new legislation work?
In principle the change is disarmingly simple, and will now deem that each engagement of the worker, by the employment agency etc., is regarded as a separate employment.
Since 1998, legislation has deemed that if substantially the whole period of an employment is performed at a single place, then any travel (i.e. from home or another private location) in order to get to or from that place, is ‘ordinary commuting’ i.e. non-allowable.
However employment agencies have often argued that a worker, albeit ‘moved’ from one period/place of client engagement to another period/place, is employed on a single overarching contract of employment by the agency. If this argument succeeds, substantially all of the employment is not performed at a single place and hence any such travel to reach that place is to a ‘temporary’ rather than permanent workplace i.e. an allowable journey. The new legislation therefore expects to defeat this argument, by ensuring that each client engagement will be considered separately as if it was a stand-alone employment.
It is HMRC’s view that some workers of employment businesses are currently able to enjoy ‘unfair’ tax deductions. Also it is perceived that in many such cases the ’employer’ (or paying business) retains most of the benefit of this. Indeed it seems HMRC may possibly regard many ‘umbrella payrolls’ as adding little or no true commercial value, beyond generating income for themselves at the expense of the Exchequer (i.e. typically by charging a fee to the worker in return for arranging payment of ‘tax free’ expenses). The new legislation therefore seeks to remove any such perceived unfair tax/NIC advantages.
Which workers will be caught under the new legislation?
As a minimum:
– An individual (worker) must personally provide services. There will be some situations where personal services are demonstrably not provided; however it will be assumed most agency workers do provide their services personally, and the onus would be the parties if they wish to show that this test is not met.
– The personal services must be supplied to another person (the client).
– However any direct contract between the client and the worker would be excluded, hence the arrangement must involve an ’employment intermediary’ (such as an employment business or agency) being contractually placed between worker and client.
– The new rules do not however apply if the manner in which the worker provides the services is not subject to (or to the right of) supervision, direction or control, i.e. by any person. HMRC is known to interpret these tests both widely and stringently, and again it must be assumed the onus would be very much on the parties to prove that this test is not met.
– Work undertaken wholly within the client’s home is also excluded (this is a factual test).
One chink of light is that the draft guidance does accept that secondment of a worker from one place to another within the same engagement would potentially still be regarded as a move to a temporary workplace (assuming that secondment was for 2 years or less). Whilst there may be certain limited circumstances where this exception might apply, we imagine it would be difficult for an agency to ‘manipulate’ the length of a particular engagement in order to seek to take advantage of the ‘relaxation’. In practice most engagement periods are for a finite period and are determined by factors outside the employment agency’s control i.e. they are based on the client’s requirement primarily.
What about Personal Service Companies (PSCs)?
PSCs are themselves an ’employment intermediary’, and hence the worker supplied by the PSC is also potentially caught under the rules. However the draft legislation confirms the Government’s intention, as outlined in the Chancellor’s recent Autumn 2015 statement, that the PSC will have to be within ‘IR35’ to also be caught within these new travel restrictions.
In simple terms the ‘IR35’ legislation applies if the worker would be an employee of the client but for the interposition of the PSC. At present the large majority of PSCs regard their contracts as outside of IR35 and, if this is correct, then the PSC will not be caught by the new restrictions. However HMRC is currently considering consultation responses on the extent to which the IR35 rules should themselves be overhauled. Whilst HMRC sources have recently indicated that no hard and fast decisions (on IR35 changes) have yet been made, it is very much a question of ‘watching this space’.
As a PSC structure will only have to consider the new travel rules if they are also caught by IR35, another potential stumbling block is how precisely to define a PSC? In most cases a PSC will be self-evident i.e. a company owned and run by one man or woman; however for instance the structure and ownership of jointly run businesses may have to be looked at more carefully. In general the IR35 legislation (Section 48 et. seq. of Income Tax (Earnings and Pensions) Act 2003), is drawn widely to include as many businesses as possible within its definition of a PSC for this purpose. However paradoxically, in the context of the new legislation, IR35 may prove to be an excluding factor, i.e. if you are defined as a PSC but are outside of IR35, you are also outside of the new travel rules.
When might the new proposed ‘transfers of debt’ rules apply?
In common with other ‘anti-avoidance’ legislation, the new rules propose that unpaid PAYE debts can be transferred to other relevant parties. This follows a pattern initially established with the 2006 rules applicable to ‘Managed Service Companies’, as well as the 2014 legislation seeking to prevent the payment of agency workers on a ‘falsely self-employed’ basis, or being paid via ‘offshore’ companies where work has been undertaken in the UK. Briefly the new transfers of debt proposals are that:
-PAYE/NIC due on any taxable travel expenses would in the first instance be sought from the employment intermediary which paid those expenses.
– However if those duties remain unpaid, the debts may be transferred to any director of that employment intermediary, by means of serving a ‘personal liability notice’.
– As mentioned, if the IR35 rules apply to a PSC then so will the new travel rules. If in this event the PSC fails to account for the PAYE/NIC on taxable travel expenses, the debts may be transferred to the director(s) of the PSC. Presumably such a PSC may have also failed to recognise and properly apply the IR35 rules themselves; hence the business will face a challenge on more than one front.
– If there is evidence that a ‘client’ (i.e. the end user of the worker’s services) has fraudulently colluded with the intermediary i.e. by providing false evidence that the worker is not subject to supervision, direction or control, then debts may be transferred to the client (and in turn, the client’s directors if the debts remain unpaid). Whilst in practice a client will no doubt wish to determine the actual extent of supervision, direction or control of each worker, on an individual basis, under the new regime they would be unwise to share that process (formally or informally) with the Agency without extreme caution.
If you require any further information on these proposals, or indeed other ’employment intermediary’ obligations including the proposed IR35 overhaul, please contact ET4B.
At the end of July (2015) the Court of Appeal heard, and rejected, an appeal by Reed Employment plc (“Reed”), against a nine-figure assessment of arrears of PAYE/NIC by HMRC.
For anyone unfamiliar with this potential landmark case, Reed had paid its temporary employees partly in salary and partly in tax free travel expenses, ostensibly implementing a ‘variable’ salary sacrifice so that PAYE/NIC would apply only to the lower salary element. HMRC took the view that no genuine alteration to contractual salary had ever been made, hence PAYE/NIC applied to the full original contractual sum. This view was supported by both the First Tier and Upper Tribunals.
In also agreeing, the Court of Appeal highlighted the absence of any clear unequivocal statement, by the employer to the employee, that the employment contract had been changed (i.e. in any way that the employee could be said to have understood, much less agreed to, the change). For example an employer statement that there will be a ‘small reduction’ to the employee’s gross pay was seen as at best ambiguous, and could not override the ‘clarity’ of the main contract’s terms.
The Court of Appeal also accepted the earlier Tribunals’ decisions that dispensations previously issued by HMRC were not relevant in this matter. In short, Reed had previously agreed with HMRC as to what circumstances a payment of tax free expenses could be made; however it was felt to have not also explicitly agreed the salary sacrifice methodology with HMRC.
Whilst the suggestion that Reed had not made ‘full disclosure’ in discussions with HMRC seems harsh, in our view the courts were correct in regarding the ‘salary sacrifice’ and the payment of expenses as two completely separate steps (i.e. if the two operate in conjunction, then the salary sacrifice must always come first). If the salary sacrifice does not work in the first place, any subsequent payment of ‘expenses’ would be considered as mere window dressing on the payslip and would be ineffective for tax/NIC purposes. The 1960s tax case of Heaton v Bell established the premise that there must be more than a mere payslip deduction, to effect a true contractual change.
Are statutory changes to salary sacrifice rules likely?
There has been speculation (following some rather vague government announcements recently) that there will be a general attempt to ‘outlaw’ salary sacrifice in future. ET4B certainly does not see this as a simple matter and therefore happening in the short to medium term. There are a vast number of different scenarios to consider, such as the employer which automatically applies a supposedly ‘invisible’ tax free benefit in addition to salary (e.g. as in the case of most Civil Service pension contributions), employers which provide and quantify tax-favoured benefits but don’t permit them to be altered by the employee, employers which automatically ‘opt-in’ employees to receive specific benefits (e.g. stakeholder or other occupational pension contributions) unless the employee ‘opts-out’ directly, employers which operate a full flexible benefits package, and employers which allow individual employees to opt for salary sacrifice in conjunction with tax-favoured benefits (e.g. employer sponsored childcare) merely on an ad hoc basis. Arguably there is no fundamental difference between each of these schemes; merely that larger employers tend to be slightly more sophisticated in the way in which they are able to demonstrate and agree revised terms with staff.
What we will very probably see is that specific arrangements, which HMRC is known to ‘disapprove of’, will continue to be challenged actively. For example it is expected that employee travel expenses, if paid in direct conjunction with a salary sacrifice agreement, will be excluded from the proposed statutory exemption for allowable expenses (planned to be introduced in April 2016, to replace existing employer dispensations for allowable expenses).
What steps should be taken now?
The Reed case provides another timely reminder that basic principles should always be followed when implementing or reviewing salary sacrifice or flex schemes, i.e.:
In this complex area, choosing the right specialist adviser to review or implement your scheme may mean the difference between having confidence in a robust and watertight arrangement, and nervously awaiting the next knock on the door from HMRC.
HMRC publishes and periodically updates a list of ‘approved’ professional bodies, annual subscriptions to which will attract tax relief. These subscriptions may therefore be paid by employers without attracting a tax or NIC charge (though formal HMRC dispensation is needed before such payments may be excluded from employer’s forms P11D).
An updated version of this HMRC ‘List 3’ was published recently. (Tip: even those as long in the tooth as ET4B can’t remember what ‘List 1’ or ‘List 2’ used to be, so don’t bother searching!).
It is interesting that the covering text includes an HMRC comment that you can’t claim tax back on fees or subscriptions you’ve paid to professional organisations if these are not approved by HM Revenue and Customs, however don’t let that necessarily put you off! Certainly subscriptions that are deemed to have a dual business/private purpose would fail the ‘wholly exclusively and necessarily’ employee expenses deduction test. This was found to be so in the 1960s tax case of Brown v Bullock; here a bank manager was required by his employer to join a West End club in order to foster business contacts, however some of the benefits of the club were deemed to be at least partly private. The case also underlined the principle that the duties of the job, not simply the arbitrary wishes of the employer, must objectively make the expense a ‘necessary’ one.
However the more favourable case of Elwood v Utitz found that a club subscription, which gave the employee access to reduced business accommodation etc. rates, and provided nothing other than incidental private benefits, was allowable. Thus many subscriptions, although not directly identified as allowable under List 3, could be deductible if there is a direct business motive, and no private element.
In the case of Fitzpatrick v CIR, HMRC achieved some success in challenging the deductibility of newspapers purchased by journalists. The situation here could be said to be analogous to an employee paying for their own training to improve their CV – the purchase of the newspapers being considered to prepare the employees themselves for their future duties (rather than in the actual performance of their duties). However if the newspapers purchased had been more directly related to the journalists’ current actual duties (and objectively met the standard necessary test), then a different outcome may have been achieved.
Please click here for a copy of the ET4B Winter 2014_15 Newsletter
In our Newsletter we provide additional details on changes proposed by the Office of Tax Simplification (as confirmed in the Chancellor’s Autumn Statement), an update on the current round of HMRC ‘Know Your Customer’ reviews (aka PAYE Compliance Reviews), the abolition of the IR35 Business Entity Tests, and further information on the new reporting obligations which will apply to employment agencies from April 2015.
The Upper Tribunal case of Samadian v HMRC published earlier this year (2014, UKUT 0013) has revived one of HMRC’s all time favourite hobby horses, that of where a travelling expense involves a dual purpose. As most readers will know, in general expenses must be incurred ‘wholly and exclusively’ for business purposes to be allowable for tax deduction. Those wishing to dust off old tax tomes may recall that two famous cases, Ricketts v Colquhoun and Newsom v Robertson, established some basic principles in HMRC’s favour; that travel between home and ones normal workplace is considered to be at least incurred partly by personal choice, and is undertaken primarily ‘to get to/from home’ (rather than to reach another workplace to perform duties). In short both cases failed the ‘wholly and exclusively’ test.
In the Samadian case, the taxpayer was a senior medical professional who travelled regularly between home, his private practice, and his NHS employment. Both Upper and Lower tax tribunals have reinforced the HMRC view that travel between home and the private practice (in a regular and predictable pattern) is little different to the aforementioned cases. Perhaps more harshly the Tribunals also came to the view that regular travel between the NHS employment and the private practice also failed the duality of purpose test.
Even though this Upper Tribunal case does not in itself appear to create a new legal precedent (there are already adequate cases in existence), HMRC appears anxious to reinforce the ‘win’ by preparing further guidance, which has been drafted and is expected to be issued for public consumption very shortly (contrast this approach with the wall of silence which followed HMRC losing the Court of Appeal decision involving Total People Ltd’s NIC reclaim on mileage payments; a case which does clearly create new legal precedent, despite HMRC protestations to the contrary).
Whilst this updated HMRC guidance is intended to apply initially to the medical profession, it is a timely reminder that the duality of purpose hurdle has to be considered by all who make claims to deduct expenses on business. In the case of employees’ travel expenses there are of course additional statutory tests which determine whether one or more Permanent Workplaces exist – if so travel to reach there (from home or any other private place) is seen as Ordinary Commuting i.e. private travel.
When we move away from travel and consider other expenses, the rules if anything become even more blurred. Whilst an employed worker (including an office holder e.g. a director) does also have to show that such expenses are incurred ‘necessarily’ in performing the duties (i.e. that the job rather than personal preference dictates the need for the expense), in most cases the main barrier remains the ‘wholly and exclusively’ test. Although the statutory tests remain similar, the distinction between those who are self-employed and those who are employed also becomes more tenuous.
For example, if a self-employed individual works from home to earn a living, HMRC would normally regard household expenses as partially meeting the wholly and exclusively test so that a proportion of the costs will be allowable . The common HMRC view here is that there will be a specific part of the expense which is wholly and exclusively incurred for business purposes and is therefore allowable. Consider the worker turning on the heating whilst carrying out his/her trade: that specific part of the heating bill is incurred wholly and exclusively for the purposes of the trade (this contrasts with say a regular journey to work where the whole journey could have a dual purpose).
Whilst this is a subtle distinction it is at least understandable. However this does not fit transparently with HMRC’s reluctance to permit a similar proportionate deduction for ‘working from home’ expenses incurred necessarily by employees. The published guidance on home working expenses indicates that only the marginal and specific additional costs of necessary home working are deductible, and that any flat rate charges e.g. for Council Tax, Rent and Water Rates (which, HMRC asserts, would be incurred anyway) will not be allowed. It is interesting to note that HMRC appears to have implemented a tougher interpretation in this area with effect from the tax year 2006/07, without (apparently) establishing any clear additional legislation or case law precedent in support of this approach.
One thing to add here is a reference to the permitted Homeworking Allowance which may be paid to employees tax free. Whilst the sums involved (currently a maximum of £4 per week) will not set the world alight, one advantage is that the exemption relies on a simple defacto test of whether the employee regularly works from home under arrangements agreed with the employer. In particular there is no ‘necessary’ test, so for instance an employee who ‘volunteers’ to work from home should not see the claim disallowed on the basis that ‘each and every’ such employee may not necessarily incur the expense.
When considering deductions on clothing for example, the rules if anything become even more stringent. The HMRC view is that ‘ordinary wardrobe’ clothing is likely to have a dual purpose and therefore is not allowable. As illustrated in the tax case of Mallalieu v Drummond as well as earlier cases, such clothing is likely to be used for ‘warmth and decency’ (with a few exceptions, no doubt including the current crop of ‘D list’ tabloid celebrities) as well as for business. To qualify, the clothing therefore must be either protective in nature or worn as part of a uniform which easily identifies the individual as part of that organisation etc (e.g. containing a conspicuous logo).
In summary, and whilst some of these principles were developed at a time when business travel was almost exclusively undertaken in one’s horse and cart (and long before reality TV became the nightmare that good taste forgot!), the Samadian case is a timely reminder that HMRC still remains prepared to adopt a rigorous defence of its views on duality of purpose.