Why Budget 2015 will likely spare contractor expenses

A creditable and widely-held expectation that Budget 2015 would restrict if not remove contractor expenses has been thrown into doubt by a government update, writes Lucy Smith of All Umbrella Companies Are Equal.

To help understand the update, published just one week before the chancellor was expected to move against umbrella contractors’ expenses, we need to start in January last year.

Back then, the Office of Tax Simplification (OTS) reported on the tax treatment of employee benefits and expenses – a similar area to that which the taxman has just finished consulting on recently.

Handed the OTS’s report in 2014, the government replied by announcing at Budget 2014 that it intended to review the rules underlying the taxation of travel and subsistence expenses – so yes, you’ve spotted it, precisely the area which HM Revenue & Customs has just finished consulting on recently (‘Employment Intermediaries… Relief for Travel and Subsistence Expenses’).

Following Budget 2014, the government launched the first stage of that review, where it sat alongside the consultation on expenses/benefits and a call for evidence on remuneration, both of which were intended to complement the Treasury’s travel and subsistence review.

However, on Wednesday March 11th 2015, the Treasury amended the review’s online page in a way that suggests officials see too much of an overlap between their own OTS-inspired review and the HMRC consultation (or ‘discussion document’ as it prefers). So it appears there may be some joined-up thinking at the Treasury, which is indicating that while the Treasury and HMRC consultations are separate, the content of one colours the other. The upshot, based on our reading of the Treasury’s wording which is quoted below, is that the prospect of any substantive addressing in Budget 2015 regarding expenses for umbrella (and/or PSC) contractors now seems extremely slim.

“The OTS proposed that the whole system of travel expenses be reviewed against changing working patterns,” the update says adding: “Given the rate of change in working practices the government intends to start from first principles and produce a new set of rules that will work with modern day practices.”

And most crucially, certainly in terms of why Budget 2015 won’t impose the clampdown that many expected, the update states: “Given…the complexity of devising a new set of rules, the government expects that this will be a longer term piece of work, and therefore has no plan to legislate for these new rules in the remainder of the current parliament.”

So there we have it. While some umbrellas and their employees have probably been frantically exploring how they’ll survive and thrive in a world without home-to-work travel expenses, the government has seemingly kicked it all into the long grass.

Of course on the one hand, the statement “the government expects that this will be a longer term piece of work, and therefore has no plan to legislate for these new rules in the remainder of the current parliament” suggests an umbrella’s (and an umbrella contractor’s) current system for expenses via an Overarching Contract (OAC) can continue undisturbed. On the other hand, is putting something in the Budget to take effect from April 2016 legislating in “the current parliament”?  Possibly, but the likelihood is that politicians won’t agree!

If you read further into the Treasury’s update, “Stage 1” of the OTS-inspired review states “the government is now considering the findings from the first stage of this review. Further opportunities to contribute to the review will be announced in due course.” 

To most people I’ve show this wording to, the suggestion is that work is ongoing despite ‘Stage 1’ only being detailed in the update as lasting until October 2014. But it’s no surprise to me that Stage 1 might still be ongoing. Having attended the HMRC discussions on travel and subsistence late last year, there was little clarity on the subject of expenses in these areas. The knock-on effect that any changes could have on the temporary labour market also seemed unclear to contributors.

So if Stage 1 of the Treasury’s work on expenses is ongoing with findings as yet unknown, then we can determine that Stage 2 must be ongoing as well, because that second stage is “based upon the government’s findings from the first stage of the review”, the update says.

The Treasury page clarifies: “Stage 1 work continues, therefore the government will not be reporting on stage 2 of the review at Budget 2015.”

The thing is; if the position is how we describe it (that Stages 1&2 are ongoing and the whole issue of tax rules on expenses is shelved until the next parliament) why would the government insert the following caveat?

“Should the government decide to proceed with reforming the rules, any proposals will undergo a full consultation so that any interested parties can contribute their views for consideration. Please note that details of this consultation process will be published in due course.” 

One answer is that this statement may simply be leaving the door open for the chancellor to pass comment on Wednesday as far as OACs are concerned. But the options currently open for discussion seem pretty stark, and may just be an example of the Civil Service buying time by presenting options that politicians dare not accept this close to a general election.

Our gut feeling is that unflattering comments about expenses and umbrellas will be made in Budget 2015 (serving to pacify unions), but nothing material will emerge -- at this stage. Perhaps the government has realised how complicated a subject it has bitten off to chew? Perhaps they’re leaning towards making a ‘comprehensive’ change to the tax rules on expenses that would be dangerous to make before an election? Almost regardless of the answers, we think that post-election, the various working parties will reconvene with a view to taking things forward and finally making something solid on both employment status and the tax rules on contractor travel and subsistence expenses.

Finally, anyone in doubt that the government’s joined-up thinking is at play here should consider the following: we know that the Treasury requested the OTS report – but we also know from meetings with the OTS that they were working with HMRC to better ‘understand’ this tricky subject.  

Editor’s Note: Related Reading –

Budget 2015: Contractors’ Wishlist

Contractors, don’t be fooled by imposter umbrella companies

Umbrellas wary about the end of dispensations