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Contractor travel and subsistence tax relief threatened by government consultation

Limited company and umbrella company contractors could lose their tax relief on travel and subsistence costs when working at a temporary workplace if the recommendations of a new government consultation are adopted.

The Employment Intermediaries: Temporary workers – relief for travel and subsistence costs discussion document implies that limited and umbrella company contractors enjoy an unfair advantage over other employees, but Freelancer and Contractor Services Association CEO Julia Kermode highlights that this is not the case.

“All employees who work at a temporary workplace enjoy tax relief on their travel and subsistence costs, not just contractors, and for the government to claim otherwise in this consultation is misleading,” says Kermode.

“Although this review is welcomed, as it will expose non-compliant service providers to greater scrutiny, the government’s consultation only offers two options that both say stop the tax benefits of travel and subsistence for contractors.

“It seems that there is no choice being given here, and it feels like the government has already decided what it wants to do.”

Follow-up from the Autumn Statement

The consultation follows the announcement in the Autumn Statement by Chancellor George Osborne that perceived abuses of expenses claims and national minimum wage violations by umbrella companies will be tackled.

“We are also consulting on other measures including the use of so called ‘umbrella companies’ to deprive people of basic employment rights like the minimum wage and avoid tax,” warned Osborne in his speech to the House of Commons.

Rob Crossland, founder and chief executive of one of the UK’s largest umbrella companies Parasol, welcomes the consultation: “I said after the Autumn Statement that this review could be a breakthrough moment in the evolution of our sector, and this document has reinforced my impression.

“Through the Freelancer & Contractor Services Association we will be making representations to HMRC to ensure that the legitimacy of overarching contracts of employment is recognised at Budget 2015.”

Where has the government’s tax avoidance estimate come from?

Kermode is also concerned that the government’s claim that £400m of tax could be at stake is questionable: “We don’t know where HMRC got the evidence to say that tax avoidance by umbrella company contractors costs the Exchequer £400m a year.

“The Freelancer and Contractor Services Association is in the process of gathering robust data about the sector. We already know, for example, that not all of those employed through overarching contracts claim travel expenses.”

ContractorCalculator CEO Dave Chaplin highlights that HMRC’s record on estimating tax yield is far from reliable: “During the House of Lords Select Committee on Personal Service Companies inquiry, HMRC claimed that the deterrent effect of IR35 generated £550m, but was completely unable to substantiate this claim.”

Limited company contractors’ expenses tax relief is also under threat

Chaplin is also concerned that limited company contractors have been dragged into the umbrella company Contractor expenses tax relief debate, because of government fears of mass incorporation by umbrella company contractors if they lose expenses tax relief: “The consultation asks whether the removal of tax relief for travel expenses should be extended to personal services companies (PSCs).

“Even if it were possible to create an accurate and consistent definition of what a PSC actually is, which the Lords’ PSC inquiry was unable to achieve, this move would place the smallest yet most vibrant and flexible of UK businesses at a serious disadvantage when competing with large companies and overseas competitors who would face no such restrictions on claiming reliefs for their imported and employed workers.

Kermode agrees, adding: “Tax reliefs on travel and subsistence are available for anyone who is not working at a permanent workplace. A move to restrict such relief on certain sectors of the workforce would create an unlevel playing field.”

Contractors and service providers are urged to act quickly

According to Kermode, the research into the use of umbrella companies is drawing to a close but there are still opportunities to participate: “This consultation highlights more than ever the importance of having robust data about the UK’s professional employment services provider marketplace.

“Releasing the consultation just before the Christmas period with a deadline of 10 February 2015 for responses raises concerns that the results to be announced in the 2015 Budget will be a kneejerk response without due consideration of all of the issues.”

Kermode concludes: “I would urge all service providers to participate in our research by contacting me directly and both service providers and contractors should make their views known to the government by the 10 February 2015 deadline.”

Contractors and service providers can make their views known by emailing oac.review@hmrc.gsi.gov.uk.

Published: 16 December 2014

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