Time's almost up to defend contractor expenses
Just six days remain for contractors to talk the taxman out of him tightening their travel and subsistence expenses rules, writes Paul Gough, managing director of InTouch Accounting.
You’ve already been urged to contribute to his “discussion document” whether you’re an umbrella contractor, because you’ll almost definitely be affected by the outcome of the document, or a limited company contractor, because you could be affected.
Know what HMRC thinks before taking part in its discussion
Like any other discussion, it must surely help in advance to know what the other side is going to say or think. That’s what I’ll explore in this piece. Contractors might also be encouraged to speak up if they can first hear from someone like us -- a party who is neither the taxman nor his targets.
As to the former, he believes that umbrella companies and their users are stealing from him. HM Revenue & Customs is therefore trying to reach the conclusion that overarching contracts of employment (OACs) are a form of underhand scheme. HMRC really wants to say that this scheme was cooked up by shady umbrellas and other non-compliant employment intermediaries, so these parties can avoid paying an estimated £400m in Income Tax and National Insurance.
Taxman believes brollies are trying to steal from him; it’s actually the other way round
The truth is that HMRC is actually trying to steal back expenses it already approved. In particular, its officials are considering removing tax reliefs on previously acceptable expenses -- which the department itself introduced -- on the basis that too many contractors are benefiting. This is a very poor basis indeed.
Such a stealing back will not protect the interests of the vulnerable and lower paid, even though the Treasury hints that’s the goal. Specifically in December, it spoke of OACs allowing relief on home-to-work travel costs that would “not ordinarily be available” to other workers.
What the government would have us believe is that it is morally concerned by a lack of symmetry of treatment. It seems to be saying: ‘There’s a disjoint here, other types of workers not engaged under an OAC could sit next to an umbrella worker on an OAC; may make the same journey from home to the same place of work as the OAC worker, but are not able to claim tax relief for their travel costs like the OAC worker can; that’s unfair.’
Why umbrella workers are different and deserving of relief
So officialdom thinks there is a moral justification and a case for symmetry of treatment. However, that only carries weight if one assumes the risks, responsibilities and rights and obligations are all the same for differing types of worker. Which they are not!
Let me explain. Potentially vulnerable and lower paid umbrella workers are paid the National Minimum Wage by a combination of basic salary and a reimbursement of expenses which are treated as tax-free. But if the expenses are exaggerated, or should be disallowed for tax relief purposes, any unpaid tax can be (and often is) pursued by HMRC from the worker, not the umbrella/employer.
In addition, umbrella workers are also often exposed to timing delays in the cashflows through the multiple elements of the supply chain. Typically an umbrella worker has less predictability over the duration of an assignment, notably its scope for extension or renewal. In these circumstances, the risk of incurring travel costs or local accommodation costs (in the form of rail season tickets or temporary lodgings, for example) is not the same as it is for permanent employees.
Four potential motives for robbery
But let’s stay focussed on the question of why HMRC is discussing why it thinks contractors should not be entitled to claim for travel and subsistence from home to their place of work. There are four reasons in total – two we’ve partly covered and another one‘s the biggest of them all:
- ‘It’s not fair’ on other taxpayers who cannot claim, as these other taxpayers – (the non-OAC workers, referred to above) are effectively subsidising abuse.
- ‘We want to level the playing field’ (as explained above) and treat all taxpayers in the same manner.
- ‘Technically flawed planning schemes’ being deliberate abuse, especially of the vulnerable workforce who are entitled to rights at work.
- ‘Because the Treasury wants to collect more tax’ – to reduce a lot of public borrowing, a bit more tax will never be sniffed at, even if it has to be snatched back.
You probably guessed it: the most likely reason HMRC wants to rob you of expenses that it once introduced as claimable is the fourth one. The driving desire of the Revenue to raise more revenue ties in with my initial point about the department regarding what umbrellas are doing with OACs as theft.
The evidence for my assertions? Well, sat face-to-face with the tax authority last month, I asked one of its senior policy officials who specialises in employment intermediaries to set out the priorities - in order - of the various motivations for tightening contractors’ expenses rules. Having read that £400m is how much the Treasury claims that the current rules deprive the exchequer of, I knew which reason the HMRC official was steering me towards when he bluntly replied: “the country needs £400million.”
Perhaps such straight-talking from HMRC should be commended. What’s less debatable is that the £400m figure is probably accurate, due to the existence of some genuinely non-compliant business models which do indeed rely on an aggressive interpretation of tax laws. Another acknowledgement I should make is that modern employment models have indeed moved on since the original tax legislation (pertaining to expenses) was first drafted. The issue is that subsequent tax changes have simply not kept pace with current practice.
Questions (and losers) abound if home-to-work travel expenses are outlawed
So not dissimilar to Entrepreneurs’ Relief, officialdom has a good case for saying that the area seems ripe for reform. If we assume that the estimate of tax loss from HMRC is indeed correct at £400m, and that all travelling from home to work under OAC becomes non-tax-deductible, who will be the losers?
Any increase in the tax take has to come from somewhere. Will contractors and temporary professionals in general, and especially lower skilled temps, be able to afford this additional burden? Will they be able to pass it on to their employer (the umbrella)? Will the umbrella be able to pass it on (via the agency) to the end-user/client?
Further questions abound. Will UK plc be willing to pick up the costs of an extra £400m and in doing so, accept a hit on its profits? If they do, taxable profits will fall by the same amount and cut the tax UK plc pays by about £84million. So what the Revenue is discussing in its ‘discussion document’ (a consultation in all but name) regarding snatching back expenses is certainly not a ‘win-win;’ neither is it an ‘easy-win.’
For these reasons and the others set out in this piece, I’m not convinced that the Revenue should proceed with the options it has put on the table for taking back contractors’ travel and subsistence expenses. I’ll be telling the taxman this before his discussion ends on February 10th. And for the health of contracting, let’s hope you and your contractor colleagues do the same.
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