Guidance

Travel and subsistence expenses for workers engaged through 'employment intermediaries' from 6 April 2016

Published 27 April 2016

How the rules apply from 6 April 2016

From 6 April 2016, where a worker is supplying personal services through an employment intermediary, in the majority of cases the intermediary will need to consider what the worker’s employment status would be if they were contracted directly with the engager. Where the worker is an office-holder of the client, or would properly be considered an employee or office-holder if engaged directly by the client, the new legislation applies. In this case each engagement they undertake will be a separate employment for the purposes of obtaining relief for travel and subsistence expenses.

In these circumstances, it won’t currently be necessary to consider the supervision, direction or control (SDC) test. This also applies when a worker is supplying their personal services via their own personal service company (PSC), unless that service company is a managed service company (MSC) when the SDC test will need to be considered. The definition of an MSC has been amended for these legislative changes.

Where a worker’s circumstances are such that they would be properly considered as self-employed if engaged directly, the new legislation won’t apply.

Amendments to the legislation

The legislation will be amended at the earliest opportunity to reflect the announcement at Autumn Statement 2015 about when SDC needs to be considered.

Workers who are engaged through an employment intermediary (such as an umbrella company or an employment business) will then need to consider whether they are under the SDC (or right thereof) of any person, in the manner they undertake their work. Where a worker is under SDC, each engagement they undertake will be a separate employment for the purposes of obtaining relief for travel and subsistence expenses.

For practical purposes, HM Revenue and Customs (HMRC) doesn’t consider that an amendment to the existing legislation will affect the ultimate effect for the vast majority of workers currently engaged through employment intermediaries, including umbrella companies. Those who are working under SDC will, in most instances, be working in circumstances similar to those who are employees.

ESM5510 - introduction: the employment intermediaries travel expense provisions

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 342

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB Introduction

Sections 337 to 342 of Income Tax (Earnings and Pension) Act 2003 (ITEPA) prescribe when employees can obtain tax relief for travel expenses. For this purpose, ‘travel expenses’ include the actual costs of travel together with any subsistence expenditure and other associated costs that are incurred in making the journey - EIM31815. When these expenses are reimbursed there’s a corresponding National Insurance contributions (NICs) disregard.

From 6 April 2016 there are new provisions which change the treatment of travel and subsistence expenses for workers providing their personal services to clients through employment intermediaries. When these new provisions apply, each engagement the worker undertakes will be regarded as a separate employment for the purposes of travel and subsistence and therefore the worker’s travel and subsistence will be treated as if they were directly employed by the engager. This will mean that generally no relief will be given for home-to-work travel costs and associated subsistence. However, in certain circumstances, the new provisions are modified or disapplied.

In this section of the Employment Status manual these new provisions will be referred to as the employment intermediaries travel expense provisions. The tax provisions are subject to Parliamentary approval.

Ordinary commuting and permanent workplaces

The travel expense rules in sections 337 to 342 of ITEPA (including the definitions of ‘ordinary commuting’ and ‘permanent workplace’) set out where tax relief can be applied. In general, tax relief is available for travel and subsistence expenses which workers are obliged to incur and pay for:

• travel in the performance of their duties, or
• travel to or from a place they necessarily attend in the performance of their duties (excluding ordinary commuting), or
• travel between a worker’s home and a ‘temporary’ workplace

Where a worker’s expenses are reimbursed, there’s a corresponding disregard for NICs purposes.

This relief is available provided the journey isn’t ordinary commuting or private travel. No relief is available for ordinary commuting, which is travel between home (or a place that is not a workplace) and a ‘permanent workplace’.

There are a number of criteria for determining if a workplace is temporary or permanent, but in general a workplace will always be a permanent workplace if the worker:

• goes to the same workplace in the course of a period of continuous work which lasts or is likely to last more than 24 months, or
• goes to the same workplace for all or almost all of the time for which the worker is likely to hold (or continues to hold) the same employment - EIM32125

Who the changes affect

The changes affect workers personally providing services to clients through an ‘employment intermediary’ ESM5550 which could be:

• an agency
• a recruitment or employment business
• an umbrella company
• an MSC
• a PSC

When the employment intermediaries travel expense provisions apply, workers engaged through an ‘employment intermediary’ can’t claim tax relief or a disregard for NICs on the travel and subsistence expenses, such as the cost of lunch or dinner or overnight accommodation, they incur on an ordinary commute from home to work. The employment intermediaries’ expense provisions apply regardless of how workers are remunerated.

The changes

From 6 April 2016, section 339A has been introduced into ITEPA. This sets out new tax provisions for the treatment of travel and subsistence expenses for workers who personally provide services through ‘employment intermediaries’. Changes have also been made to the NICs disregard so that it mirrors the tax position where payments of, or contributions towards, such expenses are made.

There is a modification ESM5580 for workers engaged via intermediaries within the scope of the intermediaries legislation, known as IR35 (ITEPA, Part 2, Chapter 8 and the Social Security Contributions (Intermediaries) Regulations 2000). This modification applies regardless of whether or not the worker takes remuneration from the intermediary as employment income. However this modification doesn’t apply in any circumstances to companies which are MSCs, or would be MSCs but for the fact that the worker takes all their income as employment income.

Further information

The effect of the employment intermediaries travel expense provisions - ESM5520.

The application of the employment intermediaries travel expense rules, including exceptions and modification - ESM5530 onwards.

Further information on the treatment of travel and subsistence expenses:

• tax - Employment Income manual EIM31800
• National Insurance contributions - National Insurance manual NIM06250

The position for workers engaged through employment intermediaries before 6 April 2016 - ESM5680.

ESM5520 - effect of the employment intermediaries travel expense provisions and definitions

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

From 6 April 2016, when the employment intermediaries travel expense provisions apply, where a worker personally provides services through an employment intermediary each engagement undertaken will be considered a separate employment for the purposes of travel and subsistence.

The travel and subsistence expense rules will apply in the same way as they would if the worker was engaged directly. It’s therefore likely that each workplace a worker attends will fall within the definition of a permanent workplace and travel to that workplace, from home (or a place that is not a workplace) would be considered ordinary commuting for the purposes of section 338 of ITEPA. Any payment for the cost of this travel would therefore be subject to tax. In addition, the NICs disregard for travelling expenses at paragraphs 3, 3ZA and 3ZB of Part 8 of Schedule 3 to the Social Security (Contributions) Regulations 2001 won’t apply.

For tax - there’s no tax relief on travel and subsistence expenses for ordinary commuting which is travel between home (or a place that is not a workplace) and a permanent workplace.

For NICs - the NICs treatment of travel and subsistence expenses mirrors the tax position, so that there’s no NICs disregard for any reimbursed expenses in respect of travel and subsistence incurred on journeys from home to a permanent workplace.

Definitions

In the context of the employment intermediaries travel expense provisions:

Arrangements - includes any scheme, transaction or series of transactions, agreement or understanding, whether or not enforceable, and any associated operations.

Employment intermediary - means a person, other than the worker or the client, who carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour.

Engagement - means any such provision of service as is mentioned in ITEPA, section 339A(1)(a) (ie where an individual (the worker) personally provides services (which are not excluded services) to another person (the client)).

Excluded services - means services provided wholly in the client’s home.

Managed service company - means a company which is an MSC within the meaning given by section 61B ITEPA, or would be such a company disregarding subsection (1)(c) of that section.

Further information

Guidance on when the employment intermediaries travel expense provisions apply - ESM5530 onwards.

Employment intermediaries within the scope of the MSC legislation - ESM5570.

Modification relating to employment intermediaries within the scope of the Intermediaries legislation (known as IR35) - ESM5580.

The position for workers engaged through employment intermediaries before 6 April 2016 - ESM5680.

Further information on the treatment of travel and subsistence expenses:

• tax - Employment Income manual EIM31800
• National Insurance contributions - National Insurance manual NIM06250

ESM5530 - application of the employment intermediaries travel expense provisions: the basic conditions

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

From 6 April 2016, the employment intermediaries travel expense provisions apply when a worker:

1. personally provides services to another person (the client) which are not excluded services ESM5540, and
2. the services are provided, not under a contract directly between the client and the worker, but under arrangements involving an ‘employment intermediary’ ESM5550

Subject to the exception and the modification below, when both the conditions above apply the services the worker provides at each engagement will be treated as a separate employment for the purposes of the travel expenses rules in both of the following:

• sections 338, 339 and 339A of ITEPA, and
• the corresponding NICs disregard in the Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA and 3ZB

In effect, this means that when applying the travel expenses rules, a worker engaged through an employment intermediary will be treated in the same way as they would be if they were engaged directly.

Ordinary commuting

The rules for ordinary commuting in section 338 of ITEPA haven’t changed. A worker can’t claim tax relief on the cost of ordinary commuting (in general, home-to-work travel and subsistence expenses). Neither can a secondary contributor disregard from earnings any payments of, or contributions towards, expenses incurred in ordinary commuting. A journey that is essentially the same as ordinary commuting will be treated in the same way as any other ordinary commuting journey, so that:

• a worker employed through an employment intermediary ESM5550 can’t turn an ordinary commuting journey into a business journey simply by arranging a business appointment along the way
• an engager can’t turn an ordinary commuting journey into a business journey by requiring the worker to stop off on the way to carry out a business task, such as making a telephone call

Exception

There is an exception to the general provisions above, where the manner in which the worker personally provides their services isn’t subject to (or to the right of) SDC of any person ESM5560. If that’s the case, then the employment intermediaries travel expense provisions don’t apply.

Modification

There’s a modification ESM5580 for workers providing their personal services through employment intermediaries which are required to consider the intermediaries’ legislation known as IR35 ESM3000. This applies whether or not the intermediary is subject to IR35 legislation. HMRC considers that this modification can apply when a worker provides their personal services via a PSC and currently in circumstances involving other intermediaries, such as an umbrella company.

However, this modification doesn’t apply in any circumstances if the employment intermediary is an MSC within the meaning of section 61B ITEPA ESM3500 or would be an MSC if ITEPA, section 61B(1)(c) was disregarded ESM5570. In these cases the test to be considered is whether the manner in which the worker personally provides their services is not subject to (or to the right of) SDC of any person ESM5560.

ESM5540 - the basic conditions: personally provides services

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

For the employment intermediaries travel expense provisions to apply, 2 basic conditions ESM5530 must both be met. The first of the basic conditions is that an individual ‘the worker’ ‘personally provides services (which are not excluded services) to another person (the client)’ (section 339A (1)(a) ITEPA).

In this context, a worker is personally providing services when they are doing work for the client.

Excluded services

This basic condition of personally providing services isn’t met if the worker’s services are provided wholly in the client’s own home.

Example - excluded services

Paul works away from home during the week only returning at weekends. As he is away so much he decides to get help with his domestic chores. During the summer he engages a gardener, George.

George works via his own PSC which is subject to IR35. Despite this George isn’t covered by the new legislation as he’s providing his services in Paul’s own home.

ESM5550 - the basic conditions: type of employment intermediary

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

For the employment intermediaries travel expense provisions to apply 2 basic conditions ESM5530 must both be met. The second of these basic conditions is that:

‘the services are provided, not under a contract directly between the client or a person connected with the client and the worker but under arrangements involving an employment intermediary’ (section 339A (1)(b) ITEPA)

Type of employment intermediary

An employment intermediary is an entity which sits between a worker and client as part of the arrangements under which the worker personally provides services to the client. In these circumstances the worker isn’t working under a direct contract between themselves and the client (or a person connected with the client) but is working under arrangements involving the employment intermediary.

For the employment intermediaries travel expense provisions to apply the employment intermediary must be a person, other than the worker or the client (or a person connected with the client), who carries on a business (whether or not with a view to profit and whether or not in conjunction with any other business) of supplying labour.

This will include employment intermediaries which are:

• a company (including a limited company, a PSC, an MSC or an unincorporated company)
• a partnership
• an agency
• an employment or recruitment business
• an umbrella company
• an individual

Employment intermediaries within the scope of the intermediaries (IR35) legislation

The employment intermediaries travel expense provisions are modified ESM5580 when a worker personally provides their service through an intermediary which needs to consider and may be subject to the intermediaries legislation known as IR35 ESM3000. This is regardless of whether IR35 does or doesn’t apply. HMRC considers that this modification can apply when a worker provides their personal services via a PSC and currently in circumstances involving other intermediaries, such as an umbrella company.

The modification doesn’t apply to companies which are MSCs or would be if the only reason why they are not is because the worker gets all their income by way of employment income - ESM5570.

For the modifications relating to employment intermediaries within the scope of the intermediaries’ legislation (IR35) - ESM5580.

Businesses that don’t fall into the definition of an ‘employment intermediary’

The employment intermediaries travel expense provisions don’t apply when an intermediary business doesn’t fall within the definition of an ‘employment intermediary’.  

ESM5560 - supervision, direction or control

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A and Chapter 3, Part 11, section 688B

Income Tax (Pay As You Earn) Regulations 2003, Part 4, Chapter 3B

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

For the employment intermediaries travel expense provisions to apply both the basic conditions must be met ESM5530. However, even where those conditions are met, the employment intermediaries travel expense provisions don’t apply if it can be shown that the manner in which the worker provides the services isn’t subject to (or to the right of) SDC by any person. Currently this test only applies to MSCs.

The basic assumption is that, unless it is shown otherwise, all workers are under SDC in the manner in which they provide their services (in general this is how an individual carries out the duties of their role).

SDC doesn’t have to be actually exercised in practice. The test is also met if a person has the right to supervise, direct or control the worker.

Determining if SDC applies

The worker can be subject to (or to the right of) SDC by anyone including:

• the client or its subsidiary
• an employment business, agency or other employment intermediary
• independent consultants, site managers and project managers

Where there are procedures, methods and instructions which must be followed (written, verbal or implied), then it is likely there will be SDC over the manner in which the services are provided.

However, simply being required to comply with statutory requirements like health and safety procedures isn’t determinative, as all workers must comply with these.

HMRC’s view

HMRC will consider the worker’s arrangements overall when determining if SDC applies including the terms of the engagement and the way the work is actually done in practice. It won’t be sufficient that the terms of a contract imply a lack of SDC if the reality is otherwise.

Modification for intermediaries within the scope of IR35 legislation

A modification ESM5580 applies when an employment intermediary is within the scope of the intermediaries legislation known as IR35 ESM3000. In these circumstances whether a worker is subject to SDC isn’t considered. This is regardless of whether IR35 does or doesn’t apply. HMRC considers that this modification can apply when a worker provides their personal services via a PSC and currently in circumstances involving other intermediaries, such as an umbrella company.

However, this modification isn’t applicable if a worker provides their personal services through an employment intermediary which is:

• an MSC within the meaning given by section 61B ITEPA, or
• would be such a company if all the worker’s income was not employment income, specifically disregarding ITEPA, section 61B(1)(c) ESM5570

In these circumstances, SDC must always be considered along with the basic conditions ESM5530 and regardless of whether or not the employment intermediary is also required to consider IR35 legislation.

Special provisions relating to fraudulent documents and transfer of debt provisions

Special provisions apply where fraudulent documents have been provided to an employment intermediary purporting to show that a worker isn’t subject to (or to the right of) SDC ESM5650 resulting in unpaid tax.

Transfer of debt provisions can apply to unpaid tax debt in certain circumstances when the employment intermediaries travel expense provisions haven’t been applied correctly and a company hasn’t been provided with evidence from which it would be reasonable in all the circumstances to conclude that the worker wasn’t subject to (or the right of) SDC of any person ESM5660.

For these purposes, the mere assertion by a person that the manner in which the worker provided the services was not subject to (or to the right of) SDC of any person is not such evidence.

ESM5570 - employment intermediaries within the scope of the managed service companies (MSCs) legislation, Chapter 9 ITEPA

Income Tax (Earnings and Pensions) Act 2003, Part 2 Chapter 9, section 61A - 61J

Social Security Contributions (Managed Service Companies) Regulations 2007

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A and Chapter 3, Part 11, section 688B

Income Tax (Pay As You Earn) Regulations 2003, Part 4, Chapter 3B

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

Where workers personally provide their services through a company the employment intermediaries travel expense provisions apply without modification where:

1. the employment intermediary is an MSC (within the meaning of ITEPA, section 61B) or
2. would be such a company disregarding section 61B(1)(c) of ITEPA (So if all the conditions in section 61B(1) are satisfied except section 61B(1)(c) then the employment intermediaries travel expense provisions may apply.).

For guidance about section 61B(1)(c) ITEPA - ESM3500.

In these cases SDC must always be considered so that for the purposes of the employment intermediaries travel expense provisions the:

• basic conditions ESM5530 and the SDC provisions ESM5560 must be considered
• modification for employment intermediaries within the scope of the Intermediaries legislation (known as IR35) ESM5580 doesn’t apply, this is regardless of whether the intermediary at (1) or (2) above is also required to consider IR35 legislation

Transfer of liability

When an employment intermediary is an MSC, or would be such a company disregarding section 61B(1)(c) of ITEPA, and:

• fails to apply the employment intermediaries travel expense provisions relating to SDC correctly, and
• doesn’t have reasonable evidence from any other person in connection with that test, and
• doesn’t apply section 339A of ITEPA appropriately resulting in unpaid tax

then liability for the unpaid tax may transfer to:

• a director or other office-holder or associate of the employment intermediary
• an MSC provider - or a party who would be the MSC provider in cases where the employment intermediary would be an MSC disregarding section 61B(1)(c)
• a person who (directly or indirectly) has encouraged or been actively involved in the provision by the employment intermediary of the services of the individual
• a director or other office-holder, or an associate, of a person (other than an individual)

For these purposes, ‘associate’, ‘director’ and ‘MSC provider’ have the meanings given at section 688A of ITEPA - ESM3625. The meaning of ‘MSC’ has the meaning given by section 61B of ITEPA but as amended by section 339A (11) of ITEPA.

Example 1 - when the employment intermediary is an MSC - all conditions in section 61B(1) ITEPA are satisfied

Peter works as an IT consultant under arrangements with AB Recruiters (the MSC provider) who manage the provision of his services via his own service company and the associated accounting functions. The MSC legislation applies.

When determining whether the employment intermediaries travel expense provisions apply the basic conditions ESM5530 must be considered and the provisions relating to SDC ESM5560.

Example 2 - when the employment intermediary would be an MSC - section 61B(1)(c) not satisfied

An agency recently arranged for Bronwyn to set up a service company through an MSC provider. Her services are personally provided to NHS Trusts, the agency pays her PSC amounts for her services and she withdraws a salary subject to PAYE (Pay As You Earn) Income Tax and Class 1 NICs. The agency makes all the arrangements with the clients but the MSC provider deals with all accounting invoices and company returns. Bronwyn is under the control of the client in how she goes about the work.

Section 61B(1)(c) is not satisfied because the payments are made in a way which results in Bronwyn receiving payments of an amount (net of tax and Class 1 NICs) equal to that which would be received (net of tax and NICs) if every payment in respect of the services were her employment income. Bronwyn’s company would be an MSC within the meaning of section 61B(1) but disregarding subsection 61B(1)(c). Therefore, when determining whether the employment intermediaries travel expense provisions apply, the basic conditions must be considered ESM5530 and the provisions relating to SDC ESM5560. As Bronwyn is controlled in how she does her work, the employment intermediaries travel expense rules will apply.

ESM5580 - modified provisions for employment intermediaries within the scope of the intermediaries’ legislation (IR35), Chapter 8 ITEPA

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

The employment intermediaries travel expense provisions are modified when a worker provides their personal services through an employment intermediary and the engagement falls within the scope of section 49, in Chapter 8 Part 2 ITEPA. This is regardless of whether IR35 does or doesn’t apply as a result of that legislation. In these circumstances, whether the worker is subject to (or to the right of) SDC by any person ESM5560 isn’t considered, unless the intermediary is an MSC.

HMRC considers that this modification will apply (subject to the exception below) when a worker provides their personal services via their own PSC or a partnership or an individual. However, it will also currently apply when a worker is supplied via other intermediaries, such as umbrella companies.

For the purposes of the modification to the employment intermediaries travel expense provisions, in determining whether the IR35 provisions at ITEPA, sections 51, 52 or 53 are or would be met in relation to the employment intermediary:

• the words ‘that is not employment income’ are disregarded in section 50(1)(b), and
• references to the intermediary are to be read as references to the employment intermediary

Modification applies and worker is an office-holder of client, or would be an office-holder or employee if engaged directly

The employment intermediaries travel expense provisions will apply where:

• the basic conditions are met ESM5530, and
• the worker is an office-holder of the client or would be regarded as an office-holder or employee of the client if engaged directly by the client (as determined by the full terms of the arrangements applying the case law tests ESM500, and
• the conditions in section 51, 52 or 53 ITEPA are met in relation to the intermediary (and regardless of whether the worker is paid or has rights to be paid all the remuneration for his services as employment income), and
• the intermediary is not an MSC

To determine if the worker would be regarded as an office-holder or employee of the client, it is necessary to consider the actual relationship between the worker and the client and to construct a hypothetical contract. When constructing the hypothetical contract the full actual terms of the arrangements must be taken into account.

Where worker is engaged via his own PSC which is subject to IR35 (or would be but for the fact the worker takes all the PSC’s income for his services as a salary from the PSC) then the employment intermediaries travel expense provisions will apply (without the need to consider the SDC test).

HMRC consider that many workers engaged by umbrella companies would be correctly categorised as employees when the full arrangements of the engagement are considered as they apply in practice. In these cases, the employment intermediaries travel expense provisions will apply in those circumstances (without the need to consider the SDC test).

Modification applies and worker is not an office-holder of the client and would not be regarded as an office-holder or employee of the client if engaged directly

The employment intermediaries travel expense provisions won’t apply:

• where a contract is within the scope of the intermediaries legislation, and
• the worker isn’t an office-holder of the client, and wouldn’t be considered an office-holder or employee of the client if they were directly engaged by the client for the engagement (as determined by the full terms of the arrangements applying the case law tests)
• unless the intermediary is an MSC ESM5570

Exception

The modification described above relating to employment intermediaries within the scope of IR35 legislation doesn’t apply if the worker personally provides services through a company which is an MSC within the meaning given by section 61B ITEPA, or would be such a company disregarding section 61B(1)(c) ITEPA ESM5570. This is regardless of whether or not that company also needs to consider IR35 legislation.

Transfer of debt provisions

Where a PSC is working on a contract that is subject to IR35 (or would be but for the fact the worker, or an associate, takes all their remuneration from the intermediary as employment income as described above) then any unpaid tax resulting from not applying section 339A ITEPA appropriately can be transferred to the director(s) or officer(s) of the PSC ESM5670.

This also currently applies where any employment intermediary doesn’t properly consider that the worker would be considered an employee of the client if they were engaged directly.

ESM5590 - examples of the application of the employment intermediaries’ travel expense provisions

Example 1

Jim lives in Brighton and is employed through an umbrella company under an overarching contract of employment.

His umbrella company arranges work for Jim at Crawley for 3 months in X Ltd’s warehouse, then in Portsmouth for a further 3 months for Y Ltd and then finally for Z Ltd at Eastbourne for 1 month. X,Y and Z Ltd are not connected companies. At all 3 locations he works under arrangements similar to an employee. He is reimbursed for travel and subsistence costs from home to all 3 destinations (Crawley, Portsmouth and Eastbourne).

Jim isn’t entitled to tax or NICs relief for any of these journeys as the employment intermediaries travel expense provisions means that each of these 3 locations would be treated as a separate employment and so all 3 locations would be classed as permanent workplaces. The payments Jim receives for travel expenses are treated as his earnings for tax and NICs purposes.

Example 2

As in example 1, Jim is employed under an overarching contract of employment by the umbrella company under arrangements when he would be an employee of the client if engaged directly.

During the 3 months Jim is working in Crawley at X Ltd’s warehouse he is asked to spend 3 days working at X Ltd’s other warehouse in Shoreham.

He isn’t entitled to relief for travel and subsistence in respect of travel to and from Crawley, but is entitled to a deduction under ITEPA section 338 for his travel and subsistence costs to Shoreham, as this is travel to a temporary workplace and is not a new engagement. There’s also a disregard for NICs purposes for his travel and subsistence costs to go to Shoreham.

Example 3

As in example 1, for the 3 months Jim spends working in Portsmouth he decides to travel to the warehouse on Monday morning and stay in a bed and breakfast from Monday night to Thursday night before travelling back to Brighton on Friday afternoon.

As the workplace in Portsmouth is a permanent workplace under ITEPA section 339A, Jim is not entitled to a deduction for any of his travel and subsistence costs for tax and there is no disregard for NICs.

Example 4

Paula is a graphic designer and supplies her services through an employment intermediary. She lives in Bradford and works on various assignments, spending one week in York, 2 months in Glasgow, one week in London and 2 months in Exeter.

Paula works under arrangements that are properly seen as being like those of a self-employed person.

The employment intermediaries travel expense provisions don’t apply and she continues to be entitled to tax and NICs relief on reimbursed expenses for travel and subsistence costs from home to all of these locations.

ESM5600 - impact of the employment intermediaries travel expense provisions on a worker’s own PSC which is not an MSC and examples

The employment intermediaries travel expense provisions are modified ESM5580 when a worker provides their personal services through their own employment intermediary which needs to consider and may be subject to the intermediaries legislation, known as IR35 ESM3000. The most common type of intermediary to which IR35 legislation may apply is a PSC. There is no definition of a PSC for tax purposes but they are often small limited companies through which an owner/director provides their own personal services.

The modification doesn’t apply to PSCs which are MSCs within the meaning given by section 61B ITEPA, or would be such a company disregarding ITEPA, section 61B(1)(c) ESM5570.

Impact on workers operating via PSCs which are not MSCs (nor would be MSCs disregarding section 61B(1)(c) ITEPA)

From 6 April 2016, where the provisions relating to individuals providing their services via employment intermediaries which need to consider IR35 legislation apply, those workers who supply their services through their own PSC will need to treat each engagement they undertake as a separate employment for the purposes of travel and subsistence:

• where they are required to operate the intermediaries’ legislation IR35, or
• they would otherwise be operating the IR35 legislation if they weren’t receiving all their remuneration as employment income

This brings the treatment of their travel and subsistence expenses in line with that of other temporary workers and contractors, whilst ensuring that those who operate more like the self-employed are able to claim relief for their travel and subsistence expenses.

Example 1 - IR35 applies

Jeannette works via her PSC, JB Ltd on a 6 month contract providing interior design services to a luxury hotel chain where she works under the direction of the Head of Procurement.

She’s provided with office space at their largest hotel and goes there every day. She always buys lunch in the hotel restaurant. When she travels to the hotel, she is reimbursed for her travel expenses and for the cost of her lunch as a subsistence expense. The intermediaries legislation IR35 applies to the engagement.

The employment intermediaries travel expense provisions apply to Jeannette’s travel and subsistence expense payments because the basic conditions are met and JB Ltd is subject to IR35. She isn’t entitled to tax or NICs relief on her travel expenses. Whether or not Jeannette is subject to SDC doesn’t need to be considered.

Example 2 - IR35 would apply but for remuneration being taken as salary

Dean is an IT Consultant who works as a contractor via his own PSC, DG Ltd. He’s the only director and shareholder. He’s providing his personal services through DG Ltd to a trucking company, T Ltd. Dean works as part of a team under the supervision of T Ltd’s IT director.

Dean is required to travel to T Ltd’s main depot at least 3 times a week and when he does is reimbursed his travel expenses to and from home. He takes all the income of the engagement from DG Ltd as his salary. DG Ltd needs to consider IR35.

It would be subject to IR35 legislation and would need to make a deemed employment payment if Dean did not take all its income from the engagement as his employment income. As such, and because the basic conditions ESM5530 also apply, his travel expenses are subject to the employment intermediaries travel expense provisions. There’s no tax or NICs relief on his travel expenses for any of these journeys. Whether Dean is subject to SDC does not need to be considered.

Example 3 - IR35 considered but doesn’t apply

Asif works via his own PSC as a draughtsman. In the last year his personal services have been supplied to several multinational companies to work on large engineering projects. Asif takes some of his PSC’s earnings as salary and some as dividends.

Asif’s PSC needs to consider IR35 but the circumstances are such that it isn’t subject to IR35 legislation for any of its contracts. Even though the basic conditions are met, the employment intermediaries travel expense provisions don’t apply because Asif’s PSC is not subject to IR35. This is regardless of whether or not Asif takes some or all of the remuneration his PSC earns from the provision of his services as salary. Whether Asif is under SDC doesn’t need to be considered.

ESM5610 - examples relating to particular employments

In these examples the intermediary isn’t an MSC, nor would be if section 61B(1)(c) ITEPA were disregarded.

Site-based workers

Where a worker is engaged through an employment intermediary, and would be regarded as an employee if engaged directly by the client, then if they are travelling to the same site for all, or almost all, of the engagement, then they won’t be able to claim relief for their travel costs. This is also the case for temporary workers engaged directly or on a fixed term temporary contract through an agency.

Further information - EIM32132.

Depot workers

Martin is employed as a lorry driver through an employment intermediary and would be regarded as an employee if engaged directly by the client. He picks up his lorry from a depot each morning, where he also receives instructions about his delivery locations for the day. His attendance at that depot at the start and finish of each shift may be brief.

However no relief is available for the cost of travel between his home and the depot. The depot is the base from which the duties of his employment are performed and is a permanent workplace. He’s likely to be able to claim relief on his travel to make deliveries, as this would normally be considered travelling in the performance of his duties.

Further information - EIM32160.

Travelling appointments

Dave is a service engineer who’s engaged through an employment intermediary, working for a utility company and would be an employee of the utility company if engaged directly. He moves from place to place during the day carrying out repairs to domestic boilers. He receives details of the locations he needs to attend in a day whilst at home, or whilst travelling.

Dave’s work is itinerant; he holds a travelling appointment and is travelling in the performance of his duties. He is able to claim relief on all of his business travelling expenses.

Further information - EIM32366.

ESM5620 - work on more than one engagement

The employment intermediaries travel expense provisions can apply when workers work on more than one engagement. When:

• a worker personally provides services ESM5540 to work on more than one engagement, through
• an employment intermediary ESM5550 and either:
  • for intermediaries subject to the MSC provisions ESM5570, they are under the SDC ESM5560 of any party for each of these engagements, or
  • the worker is an office-holder or would be regarded as an office-holder or employee of the client if engaged directly ESM5580

then the employment intermediaries travel expense provisions apply and each engagement will be treated as a separate employment for the purposes of travel and subsistence. Therefore, tax and NICs relief are unlikely to be available on travel and subsistence expenses, unless the temporary workplace rules still apply - EIM32000 for:

• travel between home and any of these engagements, or
• for travel between the separate workplaces of any of these engagements

ESM5630 - working rule agreements

Working rule agreements (WRA) between employer representatives and trade unions govern, on a national basis, a wide range of terms and conditions of employment for workers in the construction industry and allied industries. Before 6 April 2016, when the rules of a WRA were abided by in their entirety, travel and lodging allowances could be paid tax and NICs free.

However, from 6 April 2016 this will no longer be the case if the employment intermediaries travel expense provisions apply ESM5520. In these cases HMRC will no longer apply the WRA easement to payments of home to work travel and subsistence to individuals who are working through an employment intermediary.

Where individuals are engaged through an employment intermediary and are paid travel and lodging allowances as part of a WRA, tax and NICs may be payable.

This will only affect the tax and NICs treatment of travel and lodgings allowances. It won’t affect the:

• application of the WRA easement to individuals not affected by the employment intermediaries travel expense provisions, nor
• other terms and conditions of employment included in WRAs

ESM5640 - arrangements to avoid the application of the employment intermediaries travel expense provisions

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, section 339A (10)

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraph 3ZB(7)

If arrangements are put in place, the purpose of which,or one of the main purposes of which, is to ensure that the:

• employment intermediaries travel expense provisions don’t apply, and/or
• associated provisions relating to fraudulent documents don’t apply, and/or
• associated provisions for unpaid debts don’t apply, and/or
• associated provisions for the transfer of those debts don’t apply

then those arrangements are to be disregarded for the purposes of deciding if the employment intermediaries travel expense and associated provisions apply.

In this context, ‘arrangements’ include any scheme, transaction or series of transactions, agreement or understanding, whether or not enforceable, and any associated operations.

ESM5650 - fraudulent documents

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, section 339A (7), (8) & (9))

HMRC recognises that an employment intermediary may be provided with one or more fraudulent documents intended to demonstrate that the provisions of section 339A don’t apply to a worker’s arrangements, due to the worker not being subject to (or to the right of) SDC by any person as to the manner in which the worker provides their services.

Where such a document is produced, providing the employment intermediary was unaware the document was fraudulent and it has acted upon that document in good faith for PAYE purposes, then the employment intermediary won’t be held to be the employer of the worker for the unpaid tax due as a result of the application of section 339A. The party providing the fraudulent document will instead be held to be the employer of the worker in relation to the tax due on the travel and subsistence payments as explained below.

A fraudulent document is one intentionally produced to misrepresent whether SDC is present in how a worker carries out their role, in order for them to benefit from relief on travel and subsistence.

The provisions relating to fraudulent documents don’t apply where the test of SDC ESM5560 doesn’t need to be considered.

Fraudulent document(s) provided by the client

If, either before or after the worker begins to provide the services, the client provides the employment intermediary with one or more fraudulent documents to demonstrate the worker isn’t subject to (or to the right of) SDC by any person as to the manner in which they provide their services, then after the fraudulent document is provided the worker will be treated as holding an employment with the client (the duties of which consist of the services) in respect of any payments made to which section 339A of ITEPA applies.

The client will be required to account for the unpaid tax as if it arose in respect of earnings from that employment. The client will be responsible for the operation of PAYE for tax purposes, plus any penalties imposed and interest accrued.

Fraudulent document(s) provided by a relevant person

Where the fraudulent document is provided by a ‘relevant person’, the worker will be treated as holding an employment with that relevant person and the relevant person will be required to account for unpaid tax.

In this context, a ‘relevant person’ means a person other than the client, the worker or a person connected with the employment intermediary, who:

• is resident, or has a place of business in the UK, and
• is party to a contract with the employment intermediary or a person connected with the employment intermediary under or in consequence of which:
  • the services are provided, or
  • the employment intermediary, or a person connected with the employment intermediary, makes payments in respect of the services

Further information

Liabilities of the parties and transfer of debt provisions - ESM5660.

ESM5660 - liability of the parties and transfer of debt provisions

Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 5, Chapter 2, sections 337 to 339A, and Part 11, Chapter 3, section 688B

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraphs 3, 3ZA & 3ZB

Income Tax (Pay as You Earn) Regulations 20003, Part 4, Chapter 3B

In the first instance, it is the responsibility of the employment intermediary to confirm whether or not section 339A of ITEPA and the equivalent NICs provisions apply in respect of a particular engagement. Liability rests with the employment intermediary who is responsible for deducting, accounting for and paying any tax and NICs due in accordance with the PAYE regulations. If the intermediary fails to do so, then HMRC can issue:

• Income Tax determinations under regulation 80 of the Income Tax (PAYE) Regulations 2003, and
• NICs decisions (under section 8 of the Social Security (Transfer of Functions) Act 1999 in Great Britain)

For individuals and partnerships there will be personal liability as with any other PAYE Income Tax and NICs debt. For companies the liability will initially lie with the company.

Transfer of debt provisions

When an employment intermediary is a company a relevant PAYE debt which is not paid by the ‘relevant date’ may be transferred to the director(s) or officer(s) of the company, or in the case of an MSC those parties specified in section 688A ITEPA.

The ‘relevant date’ in relation to a relevant PAYE debt is the date on which the first payment is due on which PAYE is not accounted for.

When the provisions of the employment intermediaries travel expenses haven’t been correctly applied, the relevant PAYE debt is the amount of unpaid tax not accounted for by the company in accordance with the PAYE Regulations plus interest. The tax debt can be transferred:

• where the employment intermediary has not been provided with evidence from another party from which it would be reasonable to conclude that the worker was not subject to SDC ESM5560. The mere assertion by a person that the manner in which the worker provided the services wasn’t subject to (or to the right of) SDC of any person is not such evidence
• where fraudulent documents have been provided to the employment intermediary by another party ESM5650, the debt may alternatively transfer to the client or to a relevant party (or their director(s)/officer(s))

PSCs and MSCs

Liability to pay PAYE Income Tax and Class 1 NICs sits with the employment intermediary in the first instance where:

• an employment intermediary is within the scope of ITEPA, Part 2, Chapter 8 (the Intermediaries legislation known as IR35) as described at ESM5580 or Chapter 9 (the MSC legislation) as described at ESM5570, and
• there is a deemed employment payment or a deemed employment payment would have been made but for the fact that the worker (or an associate) receives all the remuneration from the intermediary (directly or indirectly) as employment income

However, if the employment intermediary fails to apply section 339A correctly and allows tax relief incorrectly on the amount of a travel and/or subsistence expense, then any underpayment of tax may be transferred to the director(s) or officers(s) of the intermediary. In the case of companies within the scope of the MSC legislation ESM5570 liability can transfer to those parties specified in section 688A ITEPA ESM3625.

Definitions

For the recovery of unpaid tax relating to travel expenses of workers paid through intermediaries:

• company - includes a limited liability partnership
• director - has the meaning given by section 67 of ITEPA
• employment intermediary - has the same meaning as in section 339A of ITEPA
• officer, in relation to a company, means any manager, secretary or other similar officer of the company, or any person acting or purporting to act as such
• MSC means a company which:
  • is an MSC within the meaning given by section 61B, or
  • would be such a company disregarding subsection (1)(c) of that section

Penalties and Interest

The party to which any unpaid debt is transferred will also be liable for any penalties imposed and interest accrued.

Further information

For information about the provision of fraudulent documents - ESM5650.

ESM5670 - transfer of debt to directors: issue of a personal liability notice

Income Tax (Earnings and Pensions) Act 2003, section 339A

Income Tax (Pay As You Earn) Regulations 2003, Chapter 3B

Section 688A(5) ITEPA as amended by section 339A(2) of ITEPA

Issuing a ‘personal liability notice’ to company directors

Failure to apply the provisions of section 339A of ITEPA correctly may result in a person other than the employment intermediary becoming liable for the tax debt.

If that party is a company (which includes limited liability partnerships) and it fails or defaults from paying to HMRC the relevant PAYE and/or NICs debt by the required date, then HMRC may hold the director(s) or officer(s) of the company personally responsible for paying the specified amount of the PAYE debt, plus any specified interest. The interest is at the rate applicable under section 178 of the Finance Act 1989 for the purposes of section 86 of Taxes Management Act and runs from the date the notice is served.

In such instances, HMRC may serve a ‘personal liability notice’ on any person who was a director of the company on the relevant date. The relevant date in relation to a PAYE debt is the date on which the first payment is due on which PAYE is not accounted for.

The notice will required the director to pay to HMRC the specified amount of PAYE debt owing and any interest accrued within 30 days of the date the notice is served.

HMRC can serve a ‘personal liability notice’ on more than one director of the company in respect of the same PAYE debt, for which all directors are both jointly and individually liable to pay.

Regulations 97Z(L) and 97Z(M) of Income Tax (Pay as You Earn) Regulations 2003, Part 4, Chapter 3B, and Part 6 of the Taxes Management Act 1970 contain the relevant legislation under which HMRC will recover the sums due under a ‘personal liability notice’ and where appropriate, repay any surplus amounts collected plus interest accrued.

MSCs or those that would be if section 61B(1)(c) were disregarded

Where the intermediary is an MSC or would be if section 61B(1)(c) was disregarded, when there is any unpaid PAYE debt the MSC transfer of debt provisions apply. For guidance about those provisions see from ESM3615.

This means debts can be transferred to persons who include the:

• MSC directors, and
• MSC provider (or the person that would be if the intermediary would be an MSC disregarding section 61B(1)(c) ITEPA) and their directors

Appealing a personal liability notice

There are appeal rights for persons served with a ‘personal liability notice’. A notice of appeal must be submitted to HMRC within 30 days beginning on the day the ‘personal liability notice’ is served and must contain the grounds of appeal which are either that:

• all or part of the specified amount does not represent an amount of relevant PAYE debt, of the company, to which regulation 97ZI of the Income Tax (Pay As You Earn) Regulations 2003 applies, or
• the person who was served the ‘personal liability notice’ was not a director of the company on the relevant date

A person may not appeal a ‘personal liability notice’ if it has already been determined on appeal by the company that the:

• specified amount is a relevant PAYE debt of the company, and
• the company did not deduct, account for, or (as the case may be) pay the debt by the time the company was required to do so

On appeal a tribunal may:

• uphold or quash the personal liability notice, or
• where the appeal is on the grounds that part or all of the specified amount does not represent an amount of a relevant PAYE debt, the tribunal may reduce or increase the specified amount to represent the amount of the relevant PAYE debt of the company for which the director is liable

Where the intermediary is an MSC or would be if section 61B(1)(c) was disregarded, the appeal rights against the transfer of debt provisions are the same as those in the MSC legislation - ESM3640.

Withdrawal of a personal liability notice

A ‘personal liability notice’ (or in the case of MSCs a transfer notice) may be withdrawn if it is quashed by a tribunal or if an officer of HMRC considers it appropriate to withdraw the notice. In the event that an officer of HMRC withdraws the notice, then HMRC must give notice to the person upon whom that notice was served.

Interpretation.

In relation to Chapter 3B, Income Tax (Pay As You Earn) Regulations 2003 concerning ‘Certain debts of companies under section 339A of ITEPA (Travel expenses of workers providing services through employment intermediaries):

• company includes a limited liability partnership
• director has the meaning given by section 67 of ITEPA
• personal liability notice has the meaning given by regulation 97ZI(2)
• the specified amount has the meaning given by regulation 97ZI(2)(a)

Further information

Fraudulent documents - ESM5650.

Liability of the parties and transfer of debt provisions - ESM5660.

ESM5680 - the position for workers engaged through employment intermediaries before 6 April 2016

Income Tax (Earnings and Pensions) Act sections 337 to 342 (as in force before 6 April 2016)

Social Security (Contributions) Regulations 2001, Schedule 3, Part 8, paragraph 3 (as in force before 6 April 2016)

A deduction from earnings in respect of travel expenses isn’t available for ordinary commuting which is travel between home (or a place that isn’t a workplace) and a ‘permanent’ workplace. A deduction is generally available for travel in the performance of a worker’s duties or for travel between a worker’s home and a ‘temporary workplace’.

There are a number of criteria for determining whether a workplace is temporary or permanent, but in general a workplace will be a permanent workplace if the worker goes to the same workplace:

• in the course of a period of continuous work which lasts, or is likely to last, for more than 24 months, or
• for all or almost all of the time for which the worker is likely to hold, or continues to hold, the same employment. This will normally be the case if the worker is employed to work at one place on a fixed term contract

Before 6 April 2016, workers engaged through an employment intermediary, such as an umbrella company, under an overarching contract of employment were able to claim a deduction for tax purposes and a NICs disregard on reimbursed expenses for journeys that would otherwise have been considered ordinary commuting if the worker had been engaged directly or on a temporary agency contract.

This was because the employment intermediary provided ongoing employment on the same terms and conditions, despite all the assignments being temporary contracts for different engagers. These arrangements meant each workplace fell within the statutory definition of a ‘temporary’ workplace (if they were for a period of less than 24 months) and a deduction for the cost of home to work travel and subsistence was allowed.

From 6 April 2016, the introduction of section 339A Income Tax (Earnings and Pensions) Act 2003 and related NICs provisions changed the treatment of travel and subsistence expenses for workers who provide their services through ‘employment intermediaries’ ESM5550, including recruitment agencies, umbrella companies, PSCs and other similar structures. From that date, when the relevant conditions ESM5530 are met then each assignment is considered to be a separate employment and each workplace is treated as a permanent workplace. This means workers will be regularly commuting to a permanent workplace for each assignment (ordinary commuting) and will not be eligible for tax relief on travel and subsistence expenses, nor will they be entitled to a NICs disregard on reimbursed travel and subsistence expenses.

Employment intermediaries travel expense provisions from 6 April 2016 - ESM5510 onwards.

The treatment of travel and subsistence expenses:

• tax - Employment Income manual EIM31800
• National Insurance contributions - National Insurance manual NIM06250