Umbrella and limited company contractors face losing tax relief on their travel and subsistence payments, according to a new government consultation. This will result in major chaos in the sector and threatens the viability of the UK’s flexible workforce.
The consultation pretty much suggests denying umbrella company contractors tax relief as the default outcome of the consultation. It even suggests that the rules should apply to personal service companies (PSCs), as an anti-forestalling mechanism.
But if that happens, contractors won’t just take the loss of tens of thousands of pounds of net income on the chin. The sector will descend into chaos as new solutions are created and service providers fight it out to provide workarounds for ex-umbrella and PSC contractors who want to get back what they will perceive as their lost earnings.
Why does the Chancellor George Osborne want to destroy what is the highly efficient income tax and National Insurance Contributions (NICs) gathering machine that are umbrella companies?
Our sources suggest that the leading umbrella companies collect at least half billion pounds each year of income tax and NICs. Why kill these ‘golden tax geese’ that collect tax cheaply and efficiently at source?
Imagine if this were to be scattered among the Wild West of other trading vehicles that would spring up to replace them. HMRC would have to go out and hunt for the money instead of it being handed to them in regular instalments. That’s not a sensible use of taxpayers’ money, especially when you consider the alternative, the status quo, as fundamentally not broken.
And all this for the sake of a very questionable amount of additional tax income. HMRC estimates that £400m each year is lost through umbrella company non-compliance related to expenses.
This is the same HMRC that told a House of Lords Select Committee on Personal Service Companies that it estimated the deterrent effect of IR35 to be first £475, then £550m. And then it was completely unable to substantiate either figure with meaningful evidence.
Freelancer and Contractor Services Association CEO Julia Kermode told us that by no means do all umbrella company contractors even claim expenses. The association has commissioned research due to be released in early 2015 that will provide some hard facts about the umbrella sector and umbrella contractor behaviours.
This research should dispel HMRC and the Treasury’s misconceptions. Furthermore, most of the leading umbrellas that generate so much income tax and NICs are members. To join and prove their compliance, service providers must go through a review process.
Then to include PSCs in this exercise runs the risk of doing even more damage to the most flexible, fastest growing and high potential UK businesses that we need to create jobs and grow the economy.
The seven month long Lords’ PSC inquiry that drew on the expertise of some of the brightest and best tax, legal and contracting minds was unable to define a personal service company and demonstrate it is different from any other limited company. Any attempt by HMRC to do this runs the risk of impacting on all small businesses, not just contractors.
There is then the issue of a having a level playing field for small to medium sized enterprises (SMEs) to compete. The odds are stacked against small firms as it is, especially when bidding for public sector work.
Why should large firms save yet more tax by retaining tax relief on legitimate expenses of their staff – because they are big and can lobby more effectively against changes – and have a resulting lower cost base enabling them to undercut smaller rivals? This sort of injustice is what judicial reviews are made of.
The measures proposed by the government are to address a problem that does not really exist with a ‘done deal’ solution that will lead to chaos in one part of our economy that is flourishing. We can only hope that HMRC and government will take heed of the consultation responses and drop the proposals to remove tax relief to contractors.
You can make your views known by contacting HMRC at oac.review@hmrc.gsi.gov.uk.