Why should contractors be concerned about what was in the Queen’s Speech 2015 that sets out the legislative agenda for the new Conservative Government? Because it includes measures that may lead to the end of tax relief on contractor travel and subsistence expenses.
That in turn could result in the UK’s flexible workforce that did so much to bring the economy out of recession not being so flexible any more. Ultimately, it could drive up business costs that will inevitably be passed onto all of us, and result in skills shortages putting a brake on the UK’s economic growth.
You could be forgiven for wondering where it says expenses and subsistence tax relief for a significant number of small businesses and the workforce will be cut. It doesn’t, you’ve not missed it.
But what it does say is that income tax, National Insurance Contributions (NICs) and VAT will be frozen for the next five years. It also says no one working 30 hours per week on minimum wage will pay any income tax, and the personal allowance will be increased to £12,500.
Surely that’s all good for contractors, isn’t it? Well is would be if we knew how tax cuts for low earners and the personal allowance increase will be funded, alongside commitments to increase NHS funding that, although not included in the Queen’s Speech, featured prominently in Tory pre-election promises.
How will these measures alongside £8bn of extra NHS funding be found each year without increasing income tax, NICs and VAT?
There are, of course, a myriad of other taxes and duties that the Chancellor George Osborne can tinker with to fund the pledges and new legislation, as well as the planned cuts to the welfare bill, in his stability Budget on 8 July.
But none of them, not even corporation tax and capital gains tax, have the impact of the big three income tax, NICs, and VAT. That leaves the Chancellor options such as changes to rates and allowances and the much heralded ‘crackdown’ on tax avoidance.
Somehow, the Treasury has got it into its head, and presumably the heads of ministers, that umbrella company expenses lose the Exchequer £400m each year. And we know in the same breath HMRC is proposing that the same could be done with PSCs. This is despite the research conducted by the Freelancer and Contractor Services Association presented to MPs pre-election that clearly demonstrated the £400m assumption is flawed.
This is not idle speculation - this is the basis of an actual consultation, Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses.
A consultation that, judging by the Coalition’s record between 2010 and 2015, will typically turn into new legislation.
The new Government presumably also believes its pre-election rhetoric that somehow cracking down on tax avoidance will raise £7bn. That will almost cover the NHS shortfall.
So, how can tax avoidance legislation be beefed up to raise this money? Given that HMRC already has an increasing number of unregulated powers, this is very frightening, and the accountancy and tax profession are making very concerned noises.
The Tories are supposed to be pro-business, but despite what Prime Minister David Cameron has said about how he views small to medium sized enterprises (SMEs) as the engine room of the economy and growth companies of the future, their track record in coalition does not support this.
Cutting travel and subsistence expenses tax relief for umbrella company contractors and, if a way is found, small businesses, suddenly makes the world much smaller for contractors. Without the ability to offset travel and subsistence expenses against tax, contractors and other flexible workers will be far less willing to travel for contracts.
Both private and public sector clients could find themselves finding it increasingly difficult to attract the skills they need, because contractors will be unwilling to travel. Or they could find that rates rise sharply to compensate.
So, removing expenses tax relief in the stability Budget or any future Budget may raise a few pounds, but it could put the brakes on economic growth that is dependent on the specialist skills that highly mobile knowledge workers like contractors are able to deliver.
Contractors should be very nervous about what might happen in July, and may wish to think carefully before committing to long-term contracts far from home.