Always under IR35 - should I still go umbrella?

[malvolio]

So, imagine a worker makes legitimate claims for travel and subsistence while working via an umbrella for a client on a 12 month contract with the reasonable expectation that the contract won't continue past 12 months and that this won't be their only engagement while working for the umbrella.

At the end of the 12 months, the worker has a change of heart and decides not to take further engagements through the umbrella starts their own business/goes permie/whatever.

What is the worker to do now? Do they declare all their expenses for the past 12 month contract on their SAR as a BIK OR do they just stop claiming from the moment they knew (or could have reasonably been expected to know) they would not take multiple engagements?

Lisa, feel free to answer that one too.

He's not liable to a BIK exemption on his expenses, so they become earned income. So now he's underpaid the tax for the year. So he has to declare that to HMRC and pay it off either as a lump sum or by a reduction inhis allowance for hte next year. No problem, no penalties bar some interest owed sinc eit was an honest interpretation of the position that turned out to be wrong. Not declaring the real position is simply illegal. And in your scenario, I have no doubt the umbrella would do something about it themselves.

So which bit of "you pay taxes on your earned income" are you having problems with?

[Wanderer]

So which bit of "you pay taxes on your earned income" are you having problems with?

There is no question of not paying taxes on earned income. The point of this discussion is to determine if the tax relief available and already claimed for travel and subsistence can be retrospectively invalidated when the circumstances change or the expectation changes.

He's not liable to a BIK exemption on his expenses, so they become earned income. So now he's underpaid the tax for the year. So he has to declare that to HMRC and pay it off either as a lump sum or by a reduction inhis allowance for hte next year. No problem, no penalties bar some interest owed sinc eit was an honest interpretation of the position that turned out to be wrong. Not declaring the real position is simply illegal. And in your scenario, I have no doubt the umbrella would do something about it themselves.

OK, I found the reference. Have a read of EIM32084 from HMRC. It gives an example:

An employee has worked for his employer for 3 years. He is sent to perform full-time duties at a workplace for 18 months. After 10 months the posting is extended to 28 months. A (tax) deduction is due for the full cost of travel to and from the workplace during the first 10 months but not after that.

So in this scenario tax relief for expenses is allowable from the outset and for the first 10 months. However, when the expectation changes they are no longer allowable from that date on.

You claim that the change in circumstances would mean that the expenses were retrospectively invalidated and the worker would have to do a self assessment and declare the expenses of the first 10 months as earned income and pay tax on it. This is contrary to what HMRC says in EIM32084.

[malvolio]

There is no question of not paying taxes on earned income. The point of this discussion is to determine if the tax relief available and already claimed for travel and subsistence can be retrospectively invalidated when the circumstances change or the expectation changes.



OK, I found the reference. Have a read of EIM32084 from HMRC. It gives an example:

An employee has worked for his employer for 3 years. He is sent to perform full-time duties at a workplace for 18 months. After 10 months the posting is extended to 28 months. A (tax) deduction is due for the full cost of travel to and from the workplace during the first 10 months but not after that.

So in this scenario tax relief for expenses is allowable from the outset and for the first 10 months. However, when the expectation changes they are no longer allowable from that date on.

You claim that the change in circumstances would mean that the expenses were retrospectively invalidated and the worker would have to do a self assessment and declare the expenses of the first 10 months as earned income and pay tax on it. This is contrary to what HMRC says in EIM32084.

Right. I see your point. Except in the case we're discussing he's not an employee, he wasn't sent anywhere and he didn't have an existing permanent workplace (which is how Hector's example gets away with it since the other location was, for 10 months, a temporary one). Apart from that...

Want to try again? Seriously, it's never simple, is it, there's always some ambiguity to trip you up. Who said tax doesn't have to be taxing...

[Wanderer]

Who said tax doesn't have to be taxing...

Yep, they do make me wonder sometimes! And Moira Stewart fronting their ad campaign turned out to be deliciously ironic since she works as a freelancer just like us.

[northernladuk]

There is no question of not paying taxes on earned income. The point of this discussion is to determine if the tax relief available and already claimed for travel and subsistence can be retrospectively invalidated when the circumstances change or the expectation changes.



OK, I found the reference. Have a read of EIM32084 from HMRC. It gives an example:

An employee has worked for his employer for 3 years. He is sent to perform full-time duties at a workplace for 18 months. After 10 months the posting is extended to 28 months. A (tax) deduction is due for the full cost of travel to and from the workplace during the first 10 months but not after that.

So in this scenario tax relief for expenses is allowable from the outset and for the first 10 months. However, when the expectation changes they are no longer allowable from that date on.

You claim that the change in circumstances would mean that the expenses were retrospectively invalidated and the worker would have to do a self assessment and declare the expenses of the first 10 months as earned income and pay tax on it. This is contrary to what HMRC says in EIM32084.

Hope I haven't got this all wrong but the issue is around his first (and only) assignment with the umbrella means it is his permanent workplace from the off. The example above is for temp workplaces away from his main place of work which means it isn't a valid example from what I can see here.

Doesn't this also fall under the problems that Reed had with HMRC as detailed in this rather lengthy report.

Time to check travel expenses and update umbrella arrangements? Reed face £158m tax liability | Osborne Clarke

The key bit seems to be

HMRC argued that, for an overarching contract to exist, there needed to be an "irreducible minimum of obligation" between the parties during the period between assignments.

which there isn't if only one assignment is completed which leads to this snippet

Conclusion

The Tribunal decided that each assignment represented a separate contract of employment, and hence a separate employment under a contract of service for tax purposes. As such all travel was to the permanent workplace and the expenses were therefore ordinary commuting expenses and non-deductible (i.e. could not be paid tax free).

Which is exactly the case if you take a single assignment so will apply in this case....

Hope I haven't just confused the whole matter but that is what I read in to this situation.

[Goatfell]

Right. I see your point. Except in the case we're discussing he's not an employee, he wasn't sent anywhere and he didn't have an existing permanent workplace (which is how Hector's example gets away with it since the other location was, for 10 months, a temporary one). Apart from that...

Want to try again? Seriously, it's never simple, is it, there's always some ambiguity to trip you up. Who said tax doesn't have to be taxing...

As the OP is with a brollie, surely he is an employee of the brollie? When he is then "farmed" out to a client, those premises become a temporary place of work (for less than 103 and 6 days of course).

Something rings a bell about the brollie office being the permanent workplace? Happy to be corrected though.

Doh, from Cojak post earlier:
http://www.recruiter.co.uk/news/2013...t-contractors/

Brown explains that the introduction of ‘Gap Pay’ ensures that employment with giant is continuous and permanent, and that as a result its contractor employees are eligible to be reimbursed for T&S expenses.

“If you don’t have that the worker is deemed to be travelling to permanent worksites not temporary worksites and therefore cannot claim T&S.”

[LisaContractorUmbrella]

So, imagine a worker makes legitimate claims for travel and subsistence while working via an umbrella for a client on a 12 month contract with the reasonable expectation that the contract won't continue past 12 months and that this won't be their only engagement while working for the umbrella.

At the end of the 12 months, the worker has a change of heart and decides not to take further engagements through the umbrella starts their own business/goes permie/whatever.

What is the worker to do now? Do they declare all their expenses for the past 12 month contract on their SAR as a BIK OR do they just stop claiming from the moment they knew (or could have reasonably been expected to know) they would not take multiple engagements?

Lisa, feel free to answer that one too.

The worker would be employed through the umbrella company under an over-arching contract of employment and it is this which gives the initial entitlement to travel and subsistence expenses - the effect is that, what would be for tax purposes, a number of permanent engagements becomes a series of temporary assignments under a continuous employment. As far as your example goes I would say that the expense would be allowable up until the point that the worker became aware that they would not be working on another assignment through their umbrella company, at which point the claims should stop, as the crux of the guidance is intention. However, should HMR&C decide to investigate they may ask for evidence of intention e.g. applications for other assignments; this is a very grey area unfortunately and the sort of thing that will only be clarified through test cases.

[LisaContractorUmbrella]

As the OP is with a brollie, surely he is an employee of the brollie? When he is then "farmed" out to a client, those premises become a temporary place of work (for less than 103 and 6 days of course).

Something rings a bell about the brollie office being the permanent workplace? Happy to be corrected though.

Doh, from Cojak post earlier:
Tax compliance drives pay between assignments for giant contractors | Business intelligence for recruitment and resourcing professionals

Brown explains that the introduction of ‘Gap Pay’ ensures that employment with giant is continuous and permanent, and that as a result its contractor employees are eligible to be reimbursed for T&S expenses.

“If you don’t have that the worker is deemed to be travelling to permanent worksites not temporary worksites and therefore cannot claim T&S.”

For a contract to be over-arching it has to contain an irreducible minimum of mutuality of obligation in order to satisfy HMR&C - this requirement is the contractual provision to pay between assignments. This has been the position for years though, it's certainly nothing new.