Why almost all contractors will fail the 'SDC' expenses test

The taxman’s long-awaited consultation document on employment intermediaries and tax relief for travel and subsistence expenses has finally been released, writes Marc Scott, a director of umbrella company Liberty Bishop.

Any person can have SDC (or the right of SDC) over you

As expected, the document from HM Revenue & Customs re-affirms the sentiment echoed at March Budget 2015 by stating on page 12, under a heading entitled ‘The Proposal,’ that:

“The government’s intention is that where a worker is employed through an employment intermediary, then they will not be entitled to tax and NIC’s relief on travel and subsistence expenses incurred for home-to-work travel.

“Although only where they are supplying personal services to an engager, and under the right of supervision, direction or control of any person.”

Transfer of liability

As those who review the consultation document in detail can see, the definition of an ‘employment intermediary’ is wide. It encompasses employment businesses; umbrella companies, and PSCs (personal services companies).

Of concern here is that this causes some ambiguity with respect to the proposed options for the “transfer of liability” (page 16) in instances where relief is incorrectly applied. In a contractual chain which contains an engager and then potentially two different entities classed as an employment intermediary (either a PSC and an employment business, or an umbrella company and an employment business), is HMRC really suggesting that liability could be spread equally throughout the whole contractual chain? In addition to this issue, the right of Supervision, Direction or Control (SDC) need not sit solely with the engager; instead SDC can sit anywhere within the contractual chain.

Hard to see where SDC will NOT exist

The combination of these two factors makes it hard to envisage any scenario where a temporary worker could sit out-of-scope of the proposals. It’s even harder to envisage a scenario where Supervision, Direction or Control will not exist, especially when HMRC needs SDC only to be there in principle, as a right which may or may not be enacted in practice. This is stated on p.14 of the document.

Unrealistic picture

Despite this, HMRC does give an example of where a worker could claim travel and subsistence expenses tax relief through a lack of Supervision, Direction, and Control (Example 1 on p.15). But I would argue that this outcome is only achieved by the Revenue painting an unrealistic picture of a working relationship. They offer up the instance in which a client hires an IT consultant to build them a website but, in the example, the client has no input on how the website will end up looking, except to supply the IT consultant with photos of the products they sell and their respective prices.

Back in the real world, I cannot think of any scenario where a client would give an IT consultant such ‘free rein’ of the website design and development in this manner. Under what’s proposed, it would appear that the client could (or would) remove the worker’s ability to claim relief on travel and subsistence, merely by instructing the IT consultant that the website design needed to be consistent with the client’s branding, since it would seem that such input from the client would be classed as “direction.”

Unrealistically high hurdle

Thinking this through though, it’s not too hard to envisage that this might have been HMRC’s intention all along: to set the SDC hurdle so unrealistically high that in practice it is insurmountable and as such pretty much everyone loses out on the right to claim relief on travel and subsistence.

HMRC provides a nice set of diagrams on p.13 contrasting the current position with respect to claiming relief with the proposed position under the new rules, but given the weakness of the “able-to-claim-expenses” example I have just outlined, it’s hard to see how anyone could realistically fall outside of the greyed-out area on the “proposed position” diagram.

Fair but also workable

Before we get too carried away, however, it’s important to remember that this is only a consultation document and is therefore not an accurate reflection of what’s actually going to happen. So yes, the proposed changes are fundamental and far-reaching, but they’re only proposals and it’s precisely because they’re so far-reaching that they’ll be met with a strong set of responses from stakeholders.

Our company will be actively involved in the consultation process – both as an independent business and as a leading member of All Umbrella Companies Are Equal, the largest trade association of umbrella payroll providers. We will work hard to ensure that HMRC understands the complexities of the sector over which it is attempting to legislate in order to allow it to introduce measures which are not only fair, but are also workable.    

Editor’s Note: Related Reading –

Summer Budget 2015 hits PSC contractors, hard

Osborne in four-fold attack on contractors

Budget’s block on expenses is fraught with unknowns

How HMRC is revoking your right to expenses