HMRC's expenses review: The good, the bad and the ugly
Her Majesty’s Revenue & Customs’ ‘Temporary workers – relief for travel and subsistence expenses’ discussion paper has provoked impassioned debate within the contractor market since its publication on December 16.
The HMRC document sets out two “solutions” for addressing perceived unfairness within the Travel and Subsistence (T&S) expenses system. Both, if pursued, would remove the ability of contractors employed by an umbrella company via an overarching contract of employment to claim tax relief for travel, and associated subsistence, from home to their client’s workplace.
Contractors operating through their own personal service company (PSC) could also be affected.
On the face of it, this is undoubtedly worrying for those contractors who regularly claim T&S expenses. However, I believe the review is far from the disaster that some have suggested. HMRC’s discussion document contains positives as well as negatives for members of the contractor community. In the spirit of festive optimism, let’s explore the former first.
The tone of the document is – on the whole – sensible, proportionate and rational. For contractors, arguably the single most encouraging sentence comes on page 19 with the assertion that “the government...wants to ensure that any action it takes does not undermine genuine arrangements.”
This suggests that the taxman is approaching this task with an open mind, and will be receptive to arguments that highlight the legitimacy of the employer-employee relationship that exists between compliant umbrella providers and contractors.
Indeed, HMRC seems in several passages to accept that, for the vast majority of contractors, choosing an employed solution is about much more than just mileage and food expenses. Here are a few examples:
Firstly, on page 10, the tax authority says: “OACs (overarching contracts of employment) generate differences in access to travel and subsistence reliefs, confer additional employment rights on an individual and change the incidence of administrative obligations particularly with respect to operating PAYE compared to an agency worker.”
On page 13, it elaborates:
“Individuals employed under an OAC benefit from the employment status of ‘employee’. This entitles the individual to an enhanced set of rights in comparison to working under a more common employment business contract. These rights are only available to employees and can provide greater security for the individual.”
And, perhaps most significantly, there is the following section from page 14, which could have come straight from an umbrella company marketing brochure!
“For individuals who source their own work, working through an umbrella under an OAC will result in a reduction in their personal administrative burden. The umbrella company will take on the administrative burdens that they would otherwise have had as a self-employed individual, including the administration of tax and NICs liabilities.
“This frees the individual to concentrate on delivering their labour to the end client. The employment of such people by the umbrella companies also lowers
the regulatory burden on both the end client and the individual of ensuring compliance with employment status regulation.”
The consultation document also contains some encouraging signs that policymakers are finally learning to distinguish between compliant, professional providers that offer contractors genuine employment rights and support, and unethical umbrellas that exploit low-paid workers.
For example, the taxman seems determined to “level the playing field” by cracking down on rogue umbrellas who misuse existing T&S rules and pay individuals less than the minimum wage.
Less pleasingly, contractors who would like to respond to the discussion paper haven’t been done any favours by HMRC’s timing. As was the case with last year’s ‘false self-employment’ proposals, the consultation period covers Christmas. Given that most contractors will, perfectly naturally, will be thinking turkey rather than travel expenses over the festive season, the consultation period has effectively been shortened. Those wishing to make their case only have until February 10 to do so, and the government will make its next move the following month at Budget 2015.
More problematic than its poor sense of timing are some of HMRC’s underlying assumptions. In setting out “the case for action”, the Revenue claims that tax relief on T&S expenses for contingent workers employed by umbrella companies costs the Exchequer at least £400m a year. Disappointingly, there is no supporting explanation or calculation to back up this estimate. There is also no recognition of the wider economic contribution made by umbrella contractors – something the Freelancer and Contractor Services Association (FCSA) will quantify through its current research into the size of the market.
While contractors can take some heart from the taxman’s improved understanding of the sector, there is clearly plenty of work still to be done when it comes to tackling his misconceptions.
For example, the document shows that – when push comes to shove – HMRC still equates contractors with temporary agency workers, rather than professional business consultants who will inevitably incur costs during the course of a temporary assignment.
There is a danger that, in the short term, the review could cause anxiety among contractors who regularly make travel and subsistence claims. It could even discourage a few would-be contractors from making the leap. This would be profoundly bad for the economy at a time when the nature of work and employment is changing, and the skilled, flexible workforce is growing in size and importance.
Despite these concerns, I still maintain that contractors and service providers should view this review as an opportunity rather than a threat. However, it is an opportunity we must seize. I would therefore urge all Contractor UK readers to participate in the consultation by emailing their thoughts, suggestions and answers to the 18 consultation questions to email@example.com. I’d also like to see both umbrella and limited company contractors come together by strongly considering contacting their local MP to make the case for our important sector.