PBR: Darling may set umbrella expenses

Alistair Darling was last night tipped to define an 'umbrella company' in Monday's Pre-Budget Report to help close a tax loophole they use to deprive the Exchequer of £300million.

For a company that meets new criteria, any expense it seeks to recoup for its staff, who are typically temporary IT workers, will be disallowed unless they qualify within the engagement.

The prediction, from an ex-tax official, echoes advisers' warnings that the PBR is the likeliest place for the state to continue its clampdown on umbrellas' use of overarching contracts.

Voicing its disapproval, the Treasury says such contracts allow "some temporary workers to gain tax relief for travel expenses not available to others working in similar circumstances."

Used mainly by umbrella companies, these agreements short-change the taxman by £300m and are open to "widespread abuse" that "needs to be addressed", officials said in July.

Ex-Revenue inspector Bob said a heavy reaction would dictate travel and subsistence expenses are claimable only if the worker operates through their own company.

More likely to emerge is "a definition of an umbrella [company] and anything falling within that definition will fail the tests for allowable travel expenses unless they qualify within the engagement."

Although HMRC has told CUK it is "yet to reach a view" on industry ideas to tackle tax avoidance by umbrella workers, the state agency must be keen to replenish the Treasury's depleted coffers.

That's because income tax receipts emerged yesterday as being £1bn below a year earlier, corporation tax revenues were flat and National Insurance contributions dropped by £300million.

The annual figures, from the ONS, also show that, despite October normally being a good month for tax receipts, net borrowing was recorded in the month for the first time since 1994.

Supporting the evidence that the economic slowdown is eroding tax revenues, the National Audit Office has reported the number of unpaid tax bills has shot up by more than 20 per cent.

The collective result is a tax shortfall, which leaves the Chancellor little room for financial manoeuvre, despite numerous calls he must unveil up to £30bn in tax cuts if he is to stimulate the economy.

Moreover, this tax shortfall makes it more likely Mr Darling will look at legislative ways to balance the books, such as proposing anti-avoidance laws for umbrella companies.

However, ministers have said they will partly fund the anticipated tax cuts by a new round of efficiency savings, including curbing Whitehall's spending on IT and IT consultants.

But such savings will yield only £5bn by the most generous estimate, fuelling fears that the government will, in some form, continue its squeeze on one-person businesses to bridge the funding gap.

"If both Prime Minister and Chancellor believe that now is not the time for tax rises, then they must surely scrap the [corporation tax] increase already announced for small businesses," said Patrick King, tax principal at MacIntyre Hudson.

King was responding to the planned increase in the small companies' tax rate from the current 21 per cent, up 2 per cent from last year, rising to 22 per cent from April 2009.

Small business group the FSB urged Mr Darling to go even further, by reversing the tax rate to the level it was before it was increased by Gordon Brown in his outgoing Budget as Chancellor.

Yet the first item on the group's PBR wish-list is the abolition of IR35 - legislation that continues to cause "problems for professional contractors" who "operate through limited companies."

Not only is the law a burden for HMRC to enforce, the FSB added, but it also serves to suppress "an important route from employment and unemployment into entrepreneurship," at a time of mass job cuts.

In line with advisors at the Chartered Institute of Taxation, the lobbyist also said it was opposed to proposals to outlaw what the government calls 'income-shifting' by introducing a Family Business Tax.

Peter Fanning, CIOT's chief executive, said: "Given that the original income-shifting proposals were aimed at only...a tiny percentage of owner-manager businesses but would impact on a large proportion of them, the administrative burden would far outweigh the limited tax take."

The Federation said the tax would increase the administrative burden on the smallest businesses, adding: "As with IR35, this would be exceptionally difficult to administer with minimal return in revenue."

As in previous Pre-Budget Reports, the devil for small businesses will be in the detail and not in the chancellor's statement, which will trumpet a rescue package for the sector.

The package, hinted at by the PM and ministers in recent days, will be a mixture of initiatives on bank lending and insurance, to compensate for the recent dearth of finance.

Measures including widening access to the Small Firms' Loan guarantee scheme and pushing the already announced loan package from the European Investment Bank are on the table.

But tax giveaways have eluded small businesses in the past few PBRs and 2008 may prove no exception, particularly if anti-avoidance laws on 'entrepreneurs' relief' from CGT are introduced.

Despite the Revenue's claim it will trust entrepreneurs to deduct the right amount of tax, business advisor PKF said a mechanism to stop abuse is possibly in the PBR, now the structure of the rules have become clear.

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