12 January 2015    |    Taxation

Travel expenses and Personal Service Coys

Individuals who work through their own personal service companies (PSC) could lose the ability to claim a tax deduction for the cost of travelling to their clients’ premises. Rebecca Cave explains why the government is suggesting this fundamental shift in the tax rules.

The background

Certain employment agencies and umbrella companies (UC) are abusing the rules for claiming tax relief on travel expenses to temporary workplaces. In many cases the tax relief the individual worker achieves is cancelled out by the fee he has to pay the employment agency, so he is worse off than he would have been under a direct employment contact.

Personal Service Company and travel expensesThis is discussed in the consultation document Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses, which was released on 16 December 2014.

The details of contracts will vary but in generally the UC employs the worker on overarching contract of employment, such that UC’s address is the permanent workplace for the worker, and each work placement is a temporary workplace. The worker can then claim, and be reimbursed, expenses for travelling to each work placement plus “per diem” subsistence costs. Part of the worker’s pay may be treated as reimbursed travel expenses (using salary substitution), so PAYE and NI is not applied to that part, saving tax for the worker and the UC.

Broadly a temporary workplace is where the worker travels to in order to work for a period of no more than 24 months, and he is not expected to work there for more than 24 months. If the worker works at one place for his entire employment contract, that place can’t be a temporary workplace, even if the employment contract is for less than 24 months. There is also a 40% of working time rule, which is not relevant to this consultation.

The review of the travel expenses rules

The government is undertaking a wider review of all the tax rules for travel and subsistence expenses, but that will take some years. In the meantime it wants to block the perceived abuse of the travel and subsistence rules and has suggested two alternative fixes:

  1. to specify that where an individual is supplied through a third party, including a PSC, the workplace of the end client would in all cases be a “permanent workplace”
  2. to stop treating overarching contracts of employment as giving rise to a series of temporary ’employments’ under a permanent contract for tax purposes

The effect of option one for a contractor working through a PSC would be to disallow the cost of all travel from his “home-office” to his client’s premises, where the work on the contract is actually performed. Many contractors undertake contracts far from their homes for extended periods, as they can be reimbursed for the cost of the travel expenses and the associated subsistence (accommodation and food) while they are at the “temporary” location.

The government realises that this change would have a significant impact on skilled workers that operate through PSCs, and has asked for views from the contractor community and their advisers. It says that excluding PSCs from option one would encourage employment agencies to force workers to operate through PSCs.

The consultation is open until 10 February, and the government’s decision will be announced in the Budget in March. Any resulting changes to tax rules will not come into effect until 2016 at the earliest, and thus will be dependent on the outcome of the general election.

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