Travel managers need to review how they book trips for contractors to avoid a global clampdown on tax-avoiding "disguised employees," a tax expert has warned. "Tax authorities around the world are really starting to look at contractor arrangements because they see it as low-hanging fruit for the revenue," said Kevin Cornelius, a tax partner in the people advisory services business at EY in London. "Her Majesty's Revenue and Customs [department] in the U.K. reckons it will bring in £1.8 billion extra in the tax year to April 2020."
For the public sector, HMRC in April 2017 introduced reforms to its IR35 rules, which govern off-payroll work through an intermediary. That move has already improved HMRC's tax take by 500 million British pounds per year, according to Cornelius. Now HMRC is doing the same for the private sector, looking especially at workers trading through structures like limited companies when they should be treated as direct employees. Working as a contractor often reduces tax liability for both the employer and the worker, lets the employer avoid providing benefits like sick pay, and circumvents headcount restrictions.
One key change is that HMRC is shifting responsibility for IR35 breaches from the worker to the business hiring them. "IR35 basically now says that if you are the engaging entity and you have a self-employed contractor, you need to make a determination of whether they are an employee for tax purposes or a self-employed person," said Cornelius. "There's not a simple answer. It's based on: Are they under your control? Are they really looking more like an employee than a self-employed person? If the tax authorities disagree with you, you become liable for their taxes. For one person that might be fine, but if it's a thousand, that starts totting up. We've seen companies being asked by the tax authorities in the U.K. to provide a list of their contractors."
Travel may play a part in how a worker's status is determined, according to Earle Thomas, associate director of procurement for engineering company Buro Happold. "If you are paying for their trips on account, that could be one of the tick boxes which says to the tax authority, 'They are a hidden employee,'" said Thomas.
The obvious remedy—requiring contractors to make their own travel arrangements and to invoice for reimbursement—might not address the fundamental objection as far as the tax authority is concerned. "If you are asking contractors to travel to different places, are they exercising their right as a self-employed contractor, or are you as a company starting to say, 'You know what? You are more like an employee now.'" Cornelius wondered. "By asking them to travel to certain places, are they under your control?"
Requiring travelers to book their own travel also could solve one compliance problem but open up others, as travel managers might lose budgetary oversight and their traveler tracking and other risk management processes might be compromised. "You have to look at a whole range of factors," said Cornelius. "If booking their travel is just one factor making them look like an employee, then it might be good for you to carry on booking for duty of care reasons. That's the dilemma a lot of companies are in."
The contractor issue is so complicated, said Thomas, "that you can see why many people are burying their head in the sand over this. But you don't want to be the first test case for any of these things. The first task is to get some local legal advice and, if there is an issue, raise it up the command chain because the guys at the top won't thank you for not raising it if it ends up costing the company."
Beyond that, specific guidance can only be limited because the circumstances for each company and worker will be vastly different. However, said Cornelius, "look at your internal accounting. Do you book a flight as an employee cost or are you booking it across as a contractor cost? Where you put it in your accounting system is indicative of how you are treating that person."
Thomas recommended taking legal advice on what a contractor's contract should specify about who books and pays for travel. He also urged travel managers to consult their travel management companies.
Another issue on which travel managers and their organizations have to collaborate is figuring out who works as a contractor so the company can apply a consistent travel process. Contractors may not be clearly labeled within the company's financial, procurement or HR systems. "A lot of employers don't know who their contractors are," said Cornelius. "You need to know in order to deal with some of these risks."
Getting the designation right is important for other compliance purposes, from immigration requirements to increasingly enforced taxation rules for short-term business visitors. For workers confirmed as employees on the payroll, employers need to track their movements across borders to comply with these regulations.
The summer 2018 revision of the European Union's Posted Workers Directive has created an additional need to track crossborder movements. The revision confers on EU migrant workers the same pay and working conditions rules that apply to local workers. "We are going to see an increased focus on this because of the directive," said Cornelius. "Some national authorities are saying they want workers to be registered if they work in another country even for one day. The point is: Are contractors employees or are they contractors, and are they subject to the Posted Workers Directive when asking them to go to another country?"