“A Budget that sets out a plan for Britain for the next 5 years to keep moving us from a low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country we intend to create.” George Osborne Chancellor of the Exchequer, Summer Budget Speech 2015
This quote sets the context of the legislative changes being introduced in April 2016. There was a further dynamic in play – the change in attitude towards aggressive tax avoidance.
Our sector was vulnerable for two reasons:-
(1) There had been a 3-fold growth in T&S tax relief between 2012 and 2014 and it was growing.
(2) T&S was openly promoted and used as a tax avoidance scheme
T&S, Salary Sacrifice, IR35
HMRC’s Intention
Save £160m p.a. (T&S)
Hirer will increase rates
General Anti-Avoidance clause will catch any ‘magic bullets’
Self-Policing through threat of Transfer of Debt
QC’s Opinion “draft legislation works”
Vast majority of contractors will be caught under SDC
Not PSCs genuinely outside IR35
Fixed Expense Model will comply with relevant Salary Sacrifice rules
We’ve held numerous meetings with Treasury, HMRC, Hirers, Agencies, Accountants, Solicitors, and a pre-eminent QC in our industry, Tim Brennan.
HMRC (and Treasury) have not moved significantly throughout the consultation and their focus on £160m annual savings has over-ridden any concerns put forward by the industry.
When T&S, the Relevant Salary Sacrifice (Sub-Section 5b s289A of FA2015) and SDC are viewed together there is no ‘magic bullet’ to get round the legislation and that we should plan for a future without T&S.
You may see some ‘high risk’ and ‘convoluted’ schemes being marketed, you may see contractors being shoe-horned into PSCs but beware HMRC are already aware.
After more than 10 years in the industry, our view is that this does not signal the end of the contracting market, nor the end of the umbrella employment model.
We have seen other significant changes introduced (AWR, False Self-Employment and the reporting requirements, and even MSC legislation). We don’t like the changes, we don’t like the additional bureaucracy, but within 3 to 6 months we will have absorbed the changes and business will continue.
Supervision, Direction & Control (SDC)
Same definition as Onshore Intermediaries: False Self Employment
Final HMRC Guidance due in early February
Default assumes SDC applies
OGG will provide guide questions based on a three step process;
1. Filter out obvious by job or role
2. Filter out by pay rate
3.Consider evidence on what they do
Potential Impacts post 6th April 2016
Unaffected by T&S Legislation:
PSCs outside IR35
T&S between temporary workplaces
Other business expenses
50% of contractors who never claim T&S (for commuting)
Who’s paying for loss of tax relief?
Hirer (Higher Rate)
Agency (Reduced Margin)
Contractor (Less Take Home Pay)
We’ve seen a lot of inaccurate commentaries so it’s probably worth clarifying that some contractors will be unaffected by the T&S legislation:
Contractor’s trading through PSC and outside IR35
T&S that is “not like ordinary commuting” e.g. travelling to temporary workplaces (not including home office). Although the Salary Sacrifice legislation may bite if “fixed expenses salary” calculation isn’t used
Other expenses can be claimed (e.g. tools) but we have to stress that historically these are minor amounts
Some 50% of contractors don’t claim T&S expenses so for them it should be business as usual in fact they may benefit if, in time, higher rates are negotiated
However, the other 50% do claim expenses and could lose, on average, up to £3,500 take home pay on an annualised basis.
[These figures are drawn from across the FCSA members and associates accounting for some 90,000 contractors]
In terms of who’s paying we are faced with 3 scenarios (I have excluded umbrella margin as it is too small to make an impact on redressing the balance – 2.5% of rate after agency margin): Hirer/Agency/Contractor
VAT? Margin
Potential Risks post 6th April 2016
Directors of Employment Intermediaries (Transfer of Debt)
Fraudulent documentation
Tiny minority not caught by SDC will be caught by ‘Salary Sacrifice’
90% of PSCs not compliant with IR35 legislation!
PSC ‘light’ vulnerable to MSC legislation and/or VAT grouping
Contractors walking off-site
Contractors refusing new assignments
Hirer not putting up rates
Employment Intermediary is either the PSC or the Umbrella Employer or the Agency where the contractor is paid through agency PAYE.
Transfer of Debt comes into play if:-
(1) T&S tax relief is given where the contractor is under Supervision Direction and Control (SDC)
(2) PSC is caught by IR35
(3) Arrangement is caught by MSC Legislation
Transfer of Debt liability lies with:
PSC = PSC Director & any Shadow Directors
Umbrella Employer = Directors of Umbrella
Agency PAYE = Directors of Agency
Debt can move up the supply chain if fraudulent documentation is used
HMRC expectation is that majority of contractors employed by Umbrella Companies or paid as Agency Workers will be caught by SDC. There are very few who will be able to prove they are outside SDC particularly with the threat of debt transfer if fraudulent documents are used to prove case. Our feedback to date is that Agencies and Hirers will wash their hands of providing evidence.
Of course there will be marketing spin for miracle solutions to get around salary sacrifice, sadly the reality is that these will only apply to 1% of contractors.
Although we don’t expect any changes to IR35 before April 2017 HMRC are monitoring the level of incorporations and are warning they could act under emergency powers to suspend IR35 immediately. They believe 90% of PSCs outside IR35 are not in compliance with the rules, this could suggest a massive increase in investigations? [270 in 2014]
HMRC have already warned that they are seeing some contractors being “shoe-horned” into PSC solutions, inside IR35, to gain advantage of flat rate tax scheme (i.e. charge 20% vat on invoice and pay, depending on sector, 13% to HMRC) which could amount to £2000 pa.
HMRC are considering “refreshing” the MSC legislation with the threat of transfer of debt to agencies and/or ruling that the scheme promoter is associated with PSCs and ruling them as a tax group. The consequence would be a demand to pay-back VAT + 100% penalty + accrued interest
Other risks include walking offsite/refusing new assignments/no uplift in rates.
Let’s look at the options for contractor management in the new world;
Contractor can work directly for the Hirer, probably what HMRC would like to see.
However Hirer is responsible for correct payment of taxes and individual contractor management
Agency would have to declare margin
Billing Hirer for margins/fees would be a heavy administrative burden on all parties
No intermediary/T&S continues
HMRC won’t save £160m p.a.!
2. Contractor can become an Agency Worker and Agency run PAYE
Agency has to invest resources in non-core activity preferring to outsource (operational excellence –v- operational cost)
Agency is Employment Intermediary and Directors personally have potential Transfer of Debt liability
No T&S/No other expenses
We have spoken to many agencies large, medium and small and we see little appetite to run their own PAYE, other FCSA members have the same feedback
3. Contractors continue to use Orange Genie Group
Benefit from individualised best advice
FCSA code compliant confirming quality of advice and audited annually
All services are available to contractor – Accountancy (PSC/Self Employed) and Umbrella Employment
All services are annually audited to FCSA code by regulated accountants (EY) and solicitors (EY)
Looking in more detail at our services.
Our best advice service is annually audited to FCSA code standards. We explain the choices they can make PSC/Umbrella Employment/Self Employment/Agency PAYE where available and how each model works. We establish the best fit for them given their individual circumstances and ambitions. We do not shoe-horn contractors into solutions that do not suit them. We provide individualised advice to all contractors and, where appropriate, we provide an illustrative calculation of their anticipated take home pay.
At this time, subject to any late surprises(!) we see little change in our services :
Genie Accountancy (FCSA) will continue to provide accountancy, book-keeping and advisory services to the contractor wishing to work through a PSC. We work with Bauer and Cottrell to provide independent professional assessments of IR35 status for each assignment. We provide a cloud-based book-keeping service, FreeAgent, and will assist in setting up the company including company formation, PAYE, VAT and corporation tax registration. In addition we provide tax and wealth planning services. Our mantra is operational excellence and some 70% of our growth comes from the personal recommendation of existing clients.
We have a handful of clients operating PSCs that are inside IR35 although this varies by assignment and we have less than a handful of clients operating as self-employed.
All our staff are either professionally qualified or training to become professionally qualified with the exception of 1 administrator. Our practice is led by a Chartered Accountant who holds a practising certificate.
Genie Umbrella (FCSA) will continue to offer an outsourced employment service to agencies and will continue to operate Genie Umbrella for general contractors and Genie Education for the teaching sector.
The umbrella employment model will continue as before. We average about 53% of our contractors who do not claim expenses, they will see no change to our services nor our service levels.
Those currently claiming T&S expenses will continue in our umbrella employment as before. Where we can satisfy ourselves that they are outside SDC we will provide either a “fixed expense salary” contract of employment or we will provide an administrative service to help them complete an annual return in order to claim their PAYE tax relief. Neither of these services affect their employment rights they purely alter the way we calculate and report their tax affairs.
Unfortunately no “magic bullets” and those currently claiming T&S will see a significant reduction in take-home pay – unless the Hirer agrees to a rate increase or the supply chain cuts margins.
What’s going to happen between now and 5th April 2016?
Business as Usual
Review existing contracts and rates (Hirer-Agency) (Agency-Intermediary) (Intermediary-Contractor)
SDC definition and final guidance (mid February)
Impact Assessments
Risk Analysis
Action Plan
Contractor communication and advice
Business as usual - existing contracts, charge out rates, employment rights, T&S tax relief and salary calcualtions remain unaffected and unchanged.
SDC -
The issue we need to explore with you is how we handle contractor communications and advice'
In terms of timing and who does what....