Time for perspective as the taxman talks contractor expenses

The taxman’s move to discuss umbrella company contractors’ overarching contracts and their travel/subsistence arrangements  has, predictably, caused the doom and gloom mongers to publish messages of, well, doom and gloom, writes Lisa Keeble of ContractorUmbrella.

While the options being discussed by HM Revenue & Customs aren’t insignificant, it’s actually calmness and contributions that are needed from contractors and their advisers, not resignation and unhelpful rhetoric. That goes for PSC contractors too, as they too are being involved in the discussion.

Let’s put four things into perspective – what we’re dealing with; when, where HMRC’s understanding is and who’s being talked about.

What we’re dealing with and when

Firstly, this is a ‘discussion’ document (not a consultation document). That means it’s not a new edict carved into a stone tablet; it’s not evidence of HMRC making decisions one way or another and, let’s try to remember, not all HMRC discussions lead to cataclysmic events!

Secondly, the document quite clearly states that any potential changes to the existing system would not take place until 2016, and who knows what may happen between now and then. So while the current coalition government has achieved a sense of urgency by talking in Autumn Statement 2014 of “possible action at Budget 2015,” any changes to the tax rules for contractors will depend on the outcome of the general election.

And just to further allay the fears of those umbrella and PSC contractors who fear next Friday’s expenses might not be claimable by Monday, remember that the definition of a temporary workplace would  have to be looked at before any changes could take effect, as the concept of an overarching contract is established in employment law.

HMRC has a better take on umbrellas than before

Thirdly, the discussion document indicates, quite clearly, that HMRC has a far greater understanding of the contractor market than many people might suppose. The Revenue states that “initially, umbrella companies were largely used by specialist contractors and similar skilled individuals.”

But, it also acknowledges that “in recent years the market has expanded and those employed through an umbrella company now may have their work sourced through an employment business and be less skilled in nature”.

This is illuminating inasmuch as HMRC obviously recognises that a number of workers who should not be working through an umbrella company have been forced down that path, due to employer responsibilities turning more onerous and expensive.

It follows that genuine contractors who choose to work through umbrella companies, and their counterparts who choose to set up single person PSCs, are a very different kettle of fish to workers who are paid around minimum wage and are moved en-masse to umbrella companies as an alternative to direct employment.

The industry has known this differentiation to be important for a while. What’s positive is that we no longer seem to be alone. Indeed, if noises I’m hearing from HMRC are anything to go by, the genuine umbrella contractor and the inadvertent, reluctant umbrella ‘user’ could be much easier to identify in the future.

Who the taxman is talking about

But it’s worth emphasising that umbrella workers, of whatever hue, aren’t the only ones being talked about by the taxman. In fact, the discussion document quite openly criticises umbrella companies who operate ‘pay-day-by-pay-day’ models which HMRC view as being non-compliant with tax and social security legislation. It also criticises those brollies that are not transparent in their marketing. The document  says: “It is important that an individual’s decision of whether or not to enter into a contract with an employment intermediary is made on complete information”

The Revenue cites the Conduct of Employment Agencies and Employment Businesses Regulations 2003, which state that key information must be made available to the individual at the point at which they sign their contract (an issue that will be examined more closely in the BIS review on employment status).

The government and trade unions have put concerns over workers’ rights near the top of their recent agendas and the HMRC discussion document is reflective of that. The workers who have been moved from CIS to umbrella without any uplift in pay could definitely make reasonable accusations of exploitation. But their ire is misdirected if it is aimed at umbrella companies who are merely the facilitator of the new arrangements that have come as a direct result of new rules (the false self-employment legislation). Whether or not an umbrella company is the correct vehicle for these workers is open to debate and HMRC’s opinion seems quite clear. One of the final paragraphs of the discussion document states:

“For individuals who source their own work, working through an umbrella under an OAC (over-arching contract) 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”

So the taxman is ‘discussing’ umbrella workers and umbrella companies themselves, but he’s dragged PSCs into his debate too. In particular, the consequence of one of the options he’s talking about would be to disallow the cost of all travel from a home office to the workplace of the end-client (the place where the contracted work is carried out), for a contractor who works via their own limited company.

But this plan isn’t referred to in the HMRC document as a proposal; it’s actually called one of two “possible options,” both of which contractors are invited by HMRC to put forward their thoughts on. As the tax department says, it is “particularly interested” in the “potential impact” on PSCs of this “potential option.”

Keep calm and contribute

What the Revenue’s wording says to me is that its decision in this area is NOT cut and dried. Whether you want to point out how the removal of expenses would impact your ‘Ltd,’ or you’re an umbrella worker wanting to stress the distinction between yourself and a low-paid brolly ‘user’, it really does seem worthwhile to input into this discussion. In short, speak up because there is scope for contractors’ contributions to colour the outcome. The debate about this HMRC discussion document will rumble on, possibly to the beat of the doom-mongers, but our message to contractors for now is to contribute, keep calm and carry on!

Editor’s Note: Related Reading –

Umbrellas wary about the end of dispensations

HMRC’s expenses review: the good, the bad and the ugly

Umbrellas urged to set Osborne straight

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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