Government 'consults' on IT contractor expenses

A consultation paper to tighten up the expenses rules for IT contractors who use employment agencies and umbrella companies has been launched by the government.

At its heart, the paper attacks agencies and 120 umbrellas for encouraging temps into overarching contracts which give them tax relief on expenses other staff must pay outright.

HM Treasury said "widespread abuse" of the rules for travel expenses from both types of business by putting temps on such contracts has deprived the Exchequer of £300m in tax.

Despite the department also claiming that its consultation could end without any new legislation, the UK's freelance trade group believes fresh anti-avoidance tax laws may be incoming.

"Thanks to some providers pushing the boundaries rather too hard, we now face the risk of another anti-avoidance measure that could have unexpected knock-on effects", said John Brazier, managing director of the PCG.

"While tax avoidance is of course legal, it's obvious that expenses rules were never intended to be used in this way [minimise tax] – and some providers may not even have been applying the letter of the law correctly in any case."

In the paper, which is open to industry responses until October, Treasury officials warned that where expenses rules are being abused, "that abuse needs to be addressed."

"If the current legislation remains in place," they wrote, "there is a risk that more and more temporary workers will move to work through umbrella companies or employment agencies using overarching employment contracts in order to gain the tax advantages they offer."

David Vincent, a director at Lawspeed, reflected that the practice of agency/umbrella workers using overarching contracts for tax relief "is one that the government would like to end."

He pointed out that the state believes being able to get tax relief for travel to and from work, which regular employees cannot offset, gives agency/umbrella workers an "unfair advantage."

"There is no doubt that any agency that supplies limited company contractors should be interested," the law firm said of the announcement.

"Umbrella companies should also be concerned since, in the absence of expenses allowances, their very existence may be affected."

Vincent said the decision to consider legal action against umbrellas/agencies would be seen by most in the contracting industry as "profoundly disappointing," given the raft of current and proposed legislation.

Yet Crawford Temple, a director of Professional Passport, hinted that the government wouldn't rest until all the laws governing the commercial structures that contractors use are screwed tightly.

"If you consider the wider picture; in 2007 they [HM Treasury] created significant legislation with serious consequences of non compliance around operating through limited companies.

"They are now looking at umbrellas and I am sure they have recognised that a reduction in retention rates, brought about by the reduction in claimable expenses, could push some towards setting up their own limited company - well they have already covered that with legislation.

"My guess [then] is that the next action will be addressing IR35, looking to find a way to more easily assess status and enforce the rules. They would have then effectively covered all the bases."

However support for the consultation, entitled Tax relief for travel expenses: temporary workers and overarching employment contracts was sounded by Martin Hesketh, the managing director of Brookson.

He welcomed the attempt to "raise compliance standards" across the contracting marketplace, so as to deliver a "clearly understood level playing field" for all service providers.

But he too agreed that imposing fresh legislation on the agency and umbrella sector was not necessary for the government to meet its aim of protecting the Exchequer.

"It is our view that the answer lies in better policing and enforcement under the existing legislation rather than the removal of tax relief for all temporary workers working in this way."

Like the PCG, Brookson said the government has taken a step forward by its recognition that any proposals must account for the value flexible workers provide to the economy.

Though Roger Sinclair, a legal consultant at Egos, said the government hadn't really launched a true 'consultation', because it had already decided that legislation should be introduced.

"The [government's] real agenda is not the redress of injustice [to other workers], but the simple raising of more taxation," he said.

"The real problem we face here is double-speak; it is clear from the language used, and from the general pitch of the consultation paper, that the government has already made up its mind: it wants to raise yet more taxation, and has found yet another target to aim at."

For Mr Temple, whose business set up on the back of anti-avoidance laws for Managed Service Companies, that "target" may be more ambiguous than contractors might hope.

"The current wording…specifically refers to [umbrella] providers and agencies and there is no mention of contractors [other than in examples]," he said of the consultation, which was published on Monday.

"In theory, this seems logical as it is the 'employer' that becomes responsible for the compliance. However this will be interesting, as with the MSC Debt Transfer [rules] it is the contractor that is first for repayment".

Meanwhile, the attention of the government should be on targeting non-compliant organisations, rather than adversely impacting the reputable service providers, Mr Hesketh said.

But the threat of fresh legislation has only come about because some umbrellas and agencies started blatantly advertising their use of expenses policies solely to minimise tax.

The PCG added that it would respond in full to the consultation, which states that it has not set out to alter the expenses treatment of contractors who run limited companies.

The group welcomed the consultation's publication at a much earlier stage than those on Managed Service Companies or the Family Business Tax, which both emerged alongside a Pre-Budget Report.

Further Reading: More information on contractor expenses here.

Tuesday 22nd Jul 2008