The legal processes relating to contractors are about to undergo a significant change. From the 6th of April this year, HMRC will start defining contractor status differently and its new processes will affect the way contractors are paid. This is part of a series of measures aimed at reducing tax avoidance. It remains to be seen how effective it will be but it’s certainly something that contractors will need to familiarise themselves with.
The changes are quite complicated so we have explained them for you here.
The first thing that’s changing is the rules on claiming for travel (including subsistence). It will now only be possible to claim for this in relation to assignments that fall outside Supervision, Direction or Control. This applies regardless of what type of trader the contractor is or the tax arrangements they use.
According to HMRC, whether or not SDC applies will depend only on how the work is done and not on when or where it’s done. This means that if contractors are told when and where to do a job, they won’t be affected by SDC unless they’re also told how to do it.
For an example of how this works, consider a female designer whose services are contracted by a film distribution company to produce a poster. The designer is asked to visit the company’s offices between 9am and 5pm on a certain day, and is told what design software to use to create the final version of the poster ready for printing.
In this scenario, the designer is brought in because of her expertise. The company leaves it up to her to develop the design concept. At various points during the day, she shows her draft work to senior staff to see if they like it, but she is able to undertake the work in the way she thinks is best.
In this position, the designer can make a good case to HMRC that although there is an element of direction and control in the project, SDC should not be applied because the designer is acting autonomously in how she carries out her work.
Naturally, some cases are more complicated, especially as HMRC says the SDC can be based on what is implied even if it’s not stated explicitly. This can mean that if the terms of the arrangement mean the client could control how the work is done, SDC can apply even if that control isn’t exercised in practice.
You can find HMRC’s own guidelines on how this works here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483460/7057-draft-guidance.pdf
Under IR35 rules, mistakes in filing taxes can result in penalties for the company but not (usually) for the contractor. The new rules, however, are introducing an element of personal liability for contractors.
What this means is that the contractor, if operating as a Personal Service Company (PSC), can be liable for tax errors. In the event that the contractor has been hired through an umbrella company, the directors of that company can be liable.
Under the new system, HMRC will take a different approach to PSCs and umbrella company workers.
Workers with PSCs can determine their SDC status using IR35. In cases where IR35 can be applied, they will not be able to claim tax relief for the cost of travelling to the place of work.
Workers with umbrella companies will need to provide them with an assessment of the circumstances under which they’re working. Although it’s the umbrella company that is obliged to determine SDC status and is potentially liable in the event of error, it will not normally be in ongoing contact with the hiring organisation so will have to rely on the worker’s assessment. This could make umbrella companies more wary about who they take on.
You can see the test for umbrella companies here: www.sdcadvice.com
Only if the questionnaire is properly completed can it be treated as reliable for establishing SDC status. If it is completed fraudulently, there is the potential for a transfer of debt.
Attention to detail
Precedent always influences how legislation like this works in practice, so it’s difficult to determine at this stage exactly how the new rules will be applied. This means that it’s important to play it safe and be very careful with compliance until test cases create a clearer picture.
Some service types are clearly excluded. This includes work done in the client’s own home and multi-site work, where a worker may claim for travelling between the places where the work is done (though not for travel to and from the office at either end of the working day).
Travel and subsistence relief can be applied to accommodation, mileage, the actual cost of transport such as bus fares or train fares, and food and drink. It doesn’t apply to incidental costs.