Government warned over IT contractor expenses

Contractors who use recruitment and umbrella companies have only a few days left to tell the government how to tackle the "widespread abuse" of their expenses rules.

In its consultation, officials at HM Treasury invited comments on the frowned upon use of overarching contracts, which give such workers tax relief which is not available to most.

Asking for ideas no later than October 13 to help solve the tax disparity, officials hinted they planned to legislate by saying the "abuse" of the relief "needs to be addressed."

Failure to act will sustain £300m in tax losses, chiefly by firms using tax-free expense payments in lieu of salary, regardless of whether the expenses are actually incurred.

"Incredibly, under dispensations from HMRC, such practices can be entirely legal – though they are clearly not what dispensations are intended for," said the PCG.

Responding to the consultation, the contractor trade group urged officials not to be "heavy-handed" in their address, such as by barring certain types of worker from receiving expenses.

Instead, they argued that the government and its agencies should focus on the dispensation system, used by umbrella companies at the discretion of HMRC, by better enforcing its rules.

John Brazier, managing director of the Professional Contractors Group (PCG), called on the government not to act in any way that would make umbrella companies "unviable."

"Freelancers must continue to be entitled to tax relief on genuine expenses, even if they use umbrella companies," he said.

"The government has pledged not to interfere with expenses for freelancers using their own limited companies, and there can be no justification for attacking umbrella workers either."

Responding to officials, the PCG also cautioned against imposing a 'debt transfer' mechanism on umbrellas, arguing that the principle has not been tested under the MSC rules.

Mr Brazier added: "Employees of large consultancies can still claim expenses; independent freelance consultants must not be put at a competitive disadvantage."

Since the consultation opened, advisors warned contractors to be more scrupulous about which umbrella they choose, given that 120 have been identified by the state as abusive.

The ethics of the company – judged on whether it appears to provide compliant and best practice advice, its published service levels and its membership of professional trade bodies should be looked at.

SJD Accountancy has said a consideration of these factors should help contractors operate safely, while helping them determine if they will get paid in the event that the umbrella company doesn't.

Friday 10th Oct 2008