Travel and subsistence.
From 6 April 2016 the allowability of travel, subsistence and out of pocket expenses is dependent on whether you are caught by the Personal service companies (PSC) rules.
If you are, you cannot claim for travel to or from your base site, or hotel expenses, subsistence costs or sundry overnight expenses. Where the end user sends you to say Paris for a week then these can be claimed in the same way as a normal UK employee can claim.
Personal service companies (PSC).
HM Revenue & Customs define a service company as a company that generates the majority of its income from supplying services rather than goods to clients. A “personal service company” derives its income from the activities of one individual. A PSC has some of the following characteristics:
- One man company: a single director/shareholder (with a spouse/partner as co-director/co secretary/shareholder).
- Majority of company income derives from the services of director/shareholder.
- Services are all in relation to fixed-term contracts.
- Few fixed assets, mainly office furniture and equipment.
- Any goodwill tends to derive from the owner’s skills; it is personal to the owner.
- Has trade debtors but no material trade creditors.
- The owner-director will probably withdraw the majority of the company’s profits by dividend to pay himself each year, or split income with a spouse or partner.
- The owner-director will be attracted to use the most tax-efficient method of remuneration, probably by dividend.
- A spouse or partner may also work part-time for the company in an administrative role.
- No other employees.
- HMRC have described this sort of company as “an income-producing company”. It is concerned that such a company operates to disguise employment. These companies can operate very flexibly, they may avoid paying NICs altogether and shift income between spouses to avoid higher-rate tax year on year.
Personal service companies (PSC) working in the public sector:
There are new rules being introduced from 6 April 2017 which may affect companies and partnerships that work in the public sector. Rather than deducting tax under the CIS scheme they could deduct tax using the “IR35” rules. If this applies to you your tax bill will increase significantly.
I have not had any guidance on how this will work yet but from 6 April 2017, it is proposed that, where a company such as your own works in the public sector:
- Responsibility for IR35 moves from the you to the public authority or agency supplying the worker.
- Where IR35 applies, the public-sector body or agency will be responsible for deducting and paying employment taxes and NICs on the payments made to your company.
- The 5% flat rate deduction will be allowed from gross pay.
It is anticipated that most engagers will play safe and put all their contracting companies under this system. We are still waiting to hear how any tax/NI deducted will be set off against corporation tax. Also, whether the IR35 rules should be applied for periods prior to April 2017.
HMRC have published a series of guides on how the new rules will work. The links are below.
- This is a general overview.
- How Personal Services Companies can draw income.
- Requirement for fee payer to pay contractor net of employment tax and national insurance (both employees and employers. This will be applied to all invoiced amounts – there is no mention of a 5% deduction for expenses. The Revenue provide an example here however when I rang the Inspector to clarify how this works I was informed that their example was wrong!
- What the Public authority should do.
I have looked through these documents and am still unclear on how the new system will work. I therefore rang the IR35 enquiry line (0300 123 2326 option 5) and was advised of the following.
The agency/public sector engager will apply PAYE on the contractor’s net invoice (ie after VAT).
The PAYE deduction will cover income tax based on a code number and employee’s national insurance.
Employers national insurance will be paid by the agency/public sector
There will be no 5% allowance for expenses on this income.
The contractor will still have to complete statutory accounts, a Corporation Tax Return and comply with Companies House rules.
My spreadsheet comparing the position between:
A company outside IR35 and not affected by travel restrictions
A company within IR35 but caught by travel restrictions
My comparison spreadsheet is below. Use at your own risk.
Published 13 September 2017.
Updated 17 October 2017.