New Supervision Direction or Control (SDC) rules
by Alan Little
Starting on the 6th of April this year, HMRC is introducing new rules about Supervision, Direction and Control (SDC) and tax relief on travel expenses for contractors. The changes are part of a range of new measures designed to reduce tax avoidance by contractors. It may or may not be successful, but it definitely means that contractors will need to tighten up on compliance.
As this is HMRC, the new rules are not as straightforward as you might hope, so we’ve set out to explain them here.
Under the new rules, contractors will only be able to claim for travel (including subsistence) when their working arrangements fall outside Supervision, Direction or Control. This is the case regardless of the contractor’s tax arrangements or trading status.
HMRC will be determining SDC status based on how particular assignments are carried out. They will not be taking into account when or where the work takes place.
For example, imagine a repairman who is asked to travel to a company’s premises on a particular afternoon in order to fix a piece of machinery. He takes his own tools and, as an expert, is left to approach the repair process in the way he thinks best. When not busy elsewhere, the company manager pops in to see how he’s getting on, but as a non-expert, the manager offers no advice or instruction on how the work should be undertaken.
In this scenario, the technician should be able to demonstrate to HMRC that, although direction and control apply to the job, SDC doesn’t apply because nobody is telling the individual how to go about the work.
Of course, many cases are more complicated than this. This system is made more complicated by an HMRC decision that SDC can be determined by implication even in cases where it’s not explicitly stated. This means that if the client is in a position to exercise SDC then HMRC may treat the assignment as having that status even if, in actuality, the client hasn’t tried to do so.
HMRC has produced a set of guidelines to clarify this. The information is available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483460/7057-draft-guidance.pdf
Introducing personal liability
Under the new rules, there’s a new focus on the personal liability of the contractor for filing tax documents accurately. Under IR35, hiring companies have usually been held liable for any inaccuracies in tax matters, but now a share of responsibility is passing to the contractor.
Where contractors are operating as Personal Service Companies (PSCs), they can be directly liable for errors. Where they are working through umbrella companies, that liability will normally pass to the directors of the umbrella company.
Establishing SDC status
When a contractor is operating as a PSC, they can use IR35 to work out their SDC status. If the work they’ve been doing is covered by IR35, it won’t be possible to claim tax relief for travel expenses.
When an umbrella company is involved, it’s technically the company’s responsibility to assess the work situation and determine SDC status. In practice, however, this is difficult for most umbrella companies because they don’t have an in-depth role in the relationship between contractor and client. As a result, they are likely to have to rely on the contractor’s assessment.
The test for umbrella companies to use can be found at www.sdcadvice.com but it’s important to note that only properly completed questionnaires are suitable for determining SDC status. If a questionnaire is fraudulently completed it can lead to a transfer of debt.
How this legislation will work in practice is likely to be heavily influenced by precedent, so it could be some time before a clear picture emerges. In the meantime, it’s advisable to be very careful about compliance in order to avoid any risk of getting into trouble.
There are clear exclusions for some particular types of service. These include assignments where the work is carried out entirely within the client’s own home, and work spread across multiple sites, in which case the contractor may claim tax relief on the cost of travelling between those sites (though not on the cost of travelling between the hiring organisation’s main premises and their own home).
Travel and subsistence relief can apply to the direct cost of using transport, such as the actual cost of bus and train fares, mileage allowance for people driving their own vehicles, accommodation, and food and drink; however, it cannot also be applied to incidental costs.