Public sector attacked in Budget
Payroll expert Merin Yilmaz explains how the Budget affects locum workers
Published on 23rd March 2016
Following proposals announced in the March 2015 Budget, earlier this year HMRC published a consultation document proposing the removal of tax relief on travel and subsistence expenses for temporary workers. The consultation closed on 30 September 2015 and HMRC has now published the consultation responses and draft legislation to be introduced in Finance Bill 2016. The new legislation will take effect from 6 April 2016.
The recent Budget confirmed our fears around the end of Personal Services Companies in a scathing attack on the public sector.
The writing has been on the wall for a long time, it was inevitable and we had predicted the end of PSC's by 2017. The announcement of a singular attack on the public sector recently only confirmed what we all knew was an inevitable outcome. Given the announcement, in my view there will be no point running your own business as in effect you will be no better off than under Payee.
The confirmed Dividend tax will allow individuals £5,000 a year, however, they will suffer higher rates of tax on dividends that don't fall within the given allowance. This goes hand in hand with not allowing yourself to be paid in dividends if you are not genuinely self-employed and fail IR35 tests and Supervision Direction and Control requirements.
The Umbrella option and plain Payee are now the only two compliant options left.
Travel and Subsistence for temporary workers
The draft legislation is broadly in line with the proposals in the consultation document – i.e. a worker is denied tax and National Insurance Contributions (NIC) relief for home to work travel where they personally provide services through an employment intermediary and if they are under (or subject to the right of) the supervision, direction or control of any person. Travel and subsistence expense claims are being restricted for temporary workers working through an intermediary from April 2016. HMRC will be using SDC – supervision, direction, or control (or the right of) to determine who can claim home to site travel, and who cannot. SDC is a control test, which gathers information on what, when, where and how work is carried out and how you are supervised while the work in carried out.
If you’re outside SDC, you can continue to claim your home to site travel and subsistence. If you’re under SDC, only site to site travel can be claimed. This as well as changes to salary sacrifice contained in The Finance Act 2015 which introduced changes to the way tax relief could be applied at source. If under SDC, tax relief at source is effectively removed, apart from some concessions around mileage, and site to site travel.
What does SDC mean:
The contractor is subject to supervision. Is there someone overseeing you while you are doing work? To be supervised you must have someone overseeing you and making sure that you are doing the work that you are contractually required to do; this ‘overseer’ is checking that your work is being done correctly and to the required standard. Supervision can also involve aiding or assisting someone to develop their skills and knowledge.
The contractor can be subject to direction if there is someone making you do your work in a certain way. This ‘director’ achieves this by giving you instructions, guidelines or advice as to how the work must be performed. Someone providing direction will often coordinate how the work is done as it is being undertaken.
The contractor can be subject to control if there is someone dictating to you what work you undertake and how you go about undertaking it. You are also controlled if someone has the power to move you from one job to another.
The above are just the beginning of the control test that HMRC undertake, with a further three ways that makes the SDC test even harder to pass.
- Any person – not just an end-user – can subject you to SDC for you to fail the test
- If persons have the ‘the right of’ SDC over you for you to fail the test
- If the persons fall under just one of the SDC then you fail the test.
If you fail any element of the test it is seen that you are not of self-employed status.
All other expenses will no longer be given tax relief at source, instead
- Employees complete a tax rebate application at the end of the financial year direct with HMRC
- If annual expenses less than £2500 they complete a P87 form
- If annual expenses are £2500 or more they need to complete a self-assessment
- Tax relief is only available on PAYE tax not NI contributions
National Living Wage
The National Living Wage (NLW) is being introduced from 1st April 2016. If the contractor is 25 or over, and not in the first year of an apprenticeship, they are legally entitled to receive least £7.20 per hour. NLW will be viewed and policed similarly to the NMW (national minimum wage) £7.20 is the base pay rate, and recruiters need to add ERNI, holiday, and margin on top of this to ensure pay rates comply.
TAAR (TARGETED ANTI-AVOIDANCE RULE)
TAAR targets all tax avoidance schemes generating contrived expenses - not just those schemes of which HMRC is already aware. TAAR is intended to deter companies from entering into such schemes. It targets arrangements which create or increase relief for expenses or which seek to create any other tax advantage.
GAAR (GENERAL ANTI-ABUSE RULE)
GAAR has been introduced to strengthen HM Revenue and Customs’ (HMRC’s) anti-avoidance strategy and help HMRC tackle abusive avoidance. The GAAR legislation defines what are, for its purposes, tax arrangements that are abusive. These are schemes that are set up with no other purpose than to avoid tax.
From April 2016, the 10% tax credit on dividends will be abolished, and a £5,000 tax-free dividend allowance will be introduced. Dividends above this level will be taxed at 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate).
This allows debt to be transferred. In the case of MSC, it can be transferred from the PSC to the provider, and in extreme cases (where the agency is found to play a part in encouraging the scheme) to the agency. In relation to the onshore / offshore intermediary’s acts, the debt can be transferred all the way to the end client.
There are going to be ongoing issues in the market place, we have already seen a rise of solutions that are giving ridiculously high take home pay quotes with them actually being a EBT - employee benefit trusts which means that they 'loan' you your wages and take a 10-15% fee. What that actually means is that although people are being drawn in with a carrot of a high expected take home pay there's no actual tax being paid for them in the process so they will be hit with huge tax bills shockingly at the end of the financial year. Now is the only time to ensure you are being paid legally and compliantly so that will mean shutting down your limited company or ending your loan scheme and joining a compliant umbrella.
We have extended our welcome team mobile hours to combat any concerns and help contractors make the transition over to our umbrella models"
All questions can be emailed to firstname.lastname@example.org or call our Welcome Team on 07715902123 or 07508519550.
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