Limited company and umbrella company contractors are unlikely to be affected by the outcomes of the latest set of consultations on expenses conducted by the Office for Tax Simplification (OTS).
According to Freelancer and Contractor Services Association CEO Julia Kermode, the government’s response to the consultation of key interest to contractors, Employee Benefits and Expenses – exemption for paid or reimbursed expenses, is largely contractor neutral and will only impact negatively on non-compliant service providers.
“There is some confusion over the government’s decision to remove tax relief on travel and subsistence costs for workers using salary sacrifice schemes,” explains Kermode. “But that’s not how compliant umbrella companies work, and for that reason we welcome this measure as it will target less scrupulous providers.
“The decision to allow small businesses to use scale rates will similarly not impact on limited company contractors as on the advice of their accountants most claim actual receipted expenses, and don’t use HMRC’s scale rates,” she adds.
Dispensations will stop from April 2016
The objective of the OTS consultation was to determine whether the existing dispensation regime could be simplified and replaced in part by an exemption for reporting on travel and subsistence expenses when the worker would legitimately receive tax relief for the travel.
As Kermode notes, one outcome of the OTS review that will impact on contractors is the government’s decision to abolish dispensations from April 2016: “Dispensations are widely misunderstood and are often mistakenly interpreted as ‘get out of jail free’ cards for contractors who can claim their expenses without needing receipts.”
A dispensation simply removes the requirement for expenses and benefits in kind to be reported to HMRC using a P11D, but does not remove the requirement for the expenses to be legitimate and for full records including receipts to be kept by contractors.
“Whilst this will reduce the scope for abuse by non-compliant umbrella companies and limited company contractors, it may also mean a return to increased record keeping and reporting requirements for service providers and some contractors.”
Expenses can no longer be claimed using salary sacrifice
The recommendation that has been causing so much misplaced concern to contractors is the government’s decision not to allow tax relief on expenses that are claimed under a salary sacrifice arrangement.
This is where a worker gives up some of their taxable salary in exchange for a non-taxable benefit, such as travel and expenses costs. What happens is that the worker is paid their expenses instead of salary and not in addition to salary, so their employer is the organisation that benefits and the worker may receive less than national minimum wage (NMW).
“Umbrella company contractors who work via compliant service providers are not paid on a salary sacrifice basis,” continues Kermode. “Their travel and subsistence is paid out of the assignment fee, so they do benefit from tax relief on these costs but continue to receive the NMW.”
Draft tax legislation of the Finance Bill 2015
A raft of other legislation and responses has been published to implement the measures announced in the Autumn Statement 2014 and Budget 2014 that include:
However, Kermode is concerned that the outcome of the just launched consultation into umbrella company expenses, Employment Intermediaries: Temporary workers – relief for travel and subsistence costs, may result in all contractors being denied tax relief on legitimate travel and expenses costs.
She concludes: “Simplifying how travel and subsistence costs are reported to HMRC can only be a positive move for contractors. But our main concern and focus should be on ensuring the government does not deny the right to tax relief when this new consultation concludes.”