Future of Elective Deduction Model

Elective Deduction Model (EDM) aka Hybrid Model came into existence subsequent to the enforcement of false self-employment legislation in Apr 2014. The legislation requires every self-employed contractor caught under the definition of Supervision, Director or Control to pay full tax and national insurance as if they were employees.

Elective Deduction model relies on the fact that the false self-employment legislation is that of Tax & NI. It works on the basis that the worker remained self-employed from employment status point of view but employed for the purpose of paying Tax & NI, with the employer paying the Employer NI contribution. Since the status of the contractor is still self-employed, none of the other rules that applies to an employee such as the rights to Statutory Payments, Holiday Pay etc. and in particular NMW do not apply.

The model hence heavily relied on expenses to reduce the taxable pay, often below the NMW level maximising the take home pay for the contractor – albeit dismissed by some contractor groups as “not in the spirit of the law”.

Post April 2016 – the scenario

When the amendments to the Travel & Subsistence rules come in to force in April 2016, there will be very little justification for the contractors to use it, as it takes away their only benefit of reduced tax and NI at the cost of sacrificing every single employment rights.

The only chance of its survival will be based on contractors who will not be caught by SDC, but then the very model was created for and has been catering only to those contractors who are caught by SDS.

If you are operating EDM and looking for alternative compliant solution, contact us – we may be able to help.