24.03.16 Finance Bill 2016 - Section 339A Expenses - Travel expenses of workers providing services through intermediaries

The long awaited confirmation of the legislation to enact the implementation of section 339A Income Tax (Earnings and Pensions) Act 2003 ('ITEPA') has been published today.

The legislation is little changed from the draft legislation with the exception of one main point; This concerns the inclusion of consideration of the Managed Service Company ('MSC') test in deciding if the supervision, direction and control ('SDC') test needs to be applied.

• The original draft relied upon consideration of IR35 only, rather than requiring consideration of IR35 and the SDC test.
• The final version details that where IR35 applies (or where IR35 is excluded only by virtue of the fact that, if the service was supplied direct to the end user rather than via the Personal Service Company ('PSC') intermediary, a situation of employment would not exist) there is a new requirement to consider whether the employment intermediary (this could be the PSC or an umbrella intermediary) is a Managed Service Company ('MSC').

A summary of the legislation is as follows;

• Section 339A applies to an individual who incurs travel expenses; and
• Personally provides services to an end client; and
• Provides those services via an employment intermediary.
• In such circumstances, each engagement with the end user is to be treated as a separate employment, unless it can be demonstrated that the individual is not subject to SDC (or the right to it) by any person

The following flow chart explains the situation in respect of PSCs:

Salary Sacrifice

Section 289A ITEPA directs that an expense paid via a relevant salary sacrifice arrangement does not qualify for tax exemption via section 289A ITEPA and so, must be subject to income tax.  

The lack of corresponding National Insurance Contributions ('NIC') legislation led to mounting optimism that the deduction for NIC would remain.  Unfortunately, such hopes have been dashed with the 11^th hour implementation of The Social Security (Contributions)(Amendment) (No 2) Regulations 2016 which transfers the effect of section 289A in the taxes acts into the corresponding NIC legislation.

This means that a payment or reimbursement of travel expenses made via a relevant salary sacrifice arrangement must be subject to both income tax and NIC.  Items which are exempt elsewhere in the taxes legislation (most notably mileage allowance payments) do not form part of general earnings or specific employment income to be subject to sacrifice and so, still qualify for income tax and NIC exemption. 

View the Finance (No 2) Bill 2016 here and the Security (Contributions) (Amendment) (No. 2) Regulations 2016 here.

View Volume 1 of the Finance (No 2) Bill 2016 Explanatory Notes here and Volume 2 here.