Abolishing contractor limited company corporation tax relief for travel and subsistence expenses is anti-competitive. Furthermore, HMRC’s proposals to limit expenses tax relief could force many genuine small businesses to close, reducing the size and skill base of the flexible workforce and cutting UK plc’s global competitiveness.
This is the stark warning by Andrew Chamberlain, deputy director of policy at the Association of Independent Professionals and the Self-Employed (IPSE), who urges contractors to act now before the consultation over HMRC’s proposals closes at the end of September 2015.
“Contractors can contribute to the consultation by contacting HMRC directly giving real life examples of how abolishing tax relief will affect their livelihood. They can also lobby their local MP, as we need to generate political support to get the proposals changed.
“If the proposals are implemented in their current form, larger businesses that will remain unaffected and so can continue to claim tax relief for their employees expenses will have a competitive advantage over small businesses, many of which will simply have to close as their increased fees to make up for the lost tax relief make them uncompetitive.”
Three vital ingredients that will strip contractors of expenses rights
According to Chamberlain, there are three elements of HMRC’s proposals that underpin the devastating impact the taxman’s plans will have if implemented: “Firstly, HMRC proposes to use whether contractors are subject to, or clients have the right to, supervision, direction or control (SDC) as qualification for restricting expenses tax relief.”
Chamberlain believes the wording is significant, as inserting the word ‘or’ instead of ‘and’ suggests that if a contractor is subject to only one of the three factors, they will be caught by the rules and excluded from claiming expenses tax relief. And the client only needs the right to exercise SDC – they don’t even have to use it.
The second issue is that HMRC is proposing that the person who decides whether SDC exists will be the client. This will cause huge problems, as Chamberlain explains: “The definition of SDC given by HMRC is so open to interpretation that anyone would feel unsure whether they could say with certainty that it does or does not exist.”
Clients have to tell contractors what services they want
“Clients will want to retain some measure of control so they can make sure that the work is done to their specifications. You can imagine a client saying ‘I am very reluctant to say I don’t have any right to SDC otherwise I’m giving the freelancer carte blanche and they could end up delivering anything’.”
In the real world, briefing a supplier on a client’s requirements so they know what the client wants is an intrinsic part of any business transaction. It does not mean that the client is exerting supervision, direction and control over the supplier.
HMRC appears not to have grasped this reality, as according to the taxman the only circumstance when SDC does not apply is the rather farcical situation where the client doesn’t actually tell their contractor supplier what they want.
Future liability for tax rests with the client
“The third key factor that will result in contractors losing expenses tax relief is that should HMRC come along at a later date and decide that SDC did exist in the engagement, the current proposals suggest that the client may become be liable for any tax relief that the contractor has claimed.
“Now you have a situation where the client has to grapple with the complex terms of the legislation and think about whether it might or might not apply. And then the client will be thinking ‘if I get this wrong, I may be liable for the tax benefits enjoyed by another business’.
“There is a strong incentive for the client to simply say that SDC does exist so that they can avoid that risk. That leaves genuine businesses losing out on tax reliefs to which they are legally entitled.”
What is IPSE doing?
Chamberlain highlights that IPSE is working hard, and largely behind the scenes, to try to change the proposals: “IPSE has met with other affected stakeholders, such as representatives of recruitment agency bodies and accountancy bodies such as the Association of Chartered Certified Accountants (ACCA) and Institute of Chartered Accountants in England and Wales(ICAEW).
“We have also been asked to help the Confederation of British Industry (CBI) to formulate its response. IPSE members have been asked to contribute to a survey so we have some quantitative evidence to present alongside some case studies of how many contractors will lose their livelihoods if they can no longer claim tax relief on travel and subsistence.”
IPSE will also be submitting its own detailed response to the consultation.
Reducing the competitiveness of UK plc
Chamberlain notes that many contractors are already saying that if it were not for the fact that they can claim expenses tax relief, they would have to put up rates to such an extent that their clients would find them uncompetitive.
“Some contractors are telling us they will probably retire early, or return to employment, if these rules are introduced. This could have a devastating impact on the competitiveness of UK plc as businesses that depend on the flexible workforce for vital skills will find that the pool of available contractors and freelancers contracts sharply.
“Many of those highly skilled, flexible knowledge workers that do remain in business will limit their operations to local clients, further reducing the options for client organisations desperate for skilled workers.”
Several post recession surveys highlighted that, if it were not for the UK labour force’s flexibility, the economy would not have recovered as fast as it did, and the economy would not have grown as much as it has.
Reducing the competitiveness of small businesses
“One of the really big concerns is that these proposals will put the small one person business at a huge disadvantage compared to the much larger consultancies. The larger consultancies can send their people to projects and still claim back travel and subsistence tax relief.
“This clearly leaves small businesses at a huge disadvantage, impacting on their competitiveness.”
Is this a done deal, and at what cost to the economy?
“We are concerned that the government has presented this as a fait accompli, and it is not clear that the government has in mind any route out of this,” warns Chamberlain, “and we’re also worried that the government will press ahead even if there is compelling evidence that this is going to be damaging.
“We will almost certainly have genuine businesses who have a legitimate right to claim tax relief on expenses but they won’t be able to because of these rules. Small companies will be forced out of business and that is bad for the UK economy.
Chamberlain concludes: “I urge all contractors to submit their views as part of the consultation. If enough people make the point that the rules will impact their business to the point that it becomes unsustainable, it might give HMRC pause for thought.”
Contractors can email their responses to this address by 30 September 2015: consultation.intermediaries@hmrc.gsi.gov.uk