Will losing tax free allowances affect you?
It feels like a long time ago I was invited to offer my view, as a tax specialist, of the present situation that many contractors and temporary workers find themselves in, largely through no fault of their own. In fact, it was about 8 weeks ago but such is the pace of change in this area, the original theme I had in mind must now wait for another time. Instead I’d like to consider the Consultative Document issued on 8th July as part of the first Tory budget in 18 years, Employment Intermediaries and Tax Relief for Travel and Subsistence.
In short, HMRC is determined that expenses paid will no longer be tax free and has set a very low bar before relief is lost. Whilst there is some confusion about the issue date and consultation period, there is no doubt that responses have to be made by 30th September. The previous consultation in this area received 85 responses. Of these, just 3 came from individuals. This MUST change.
The Consultation itself admits that; “The government has received no evidence that changes in this area will impact negatively on the flexible workforce and we do not believe this will be the case.” In short, the Government is determined to ignore the comments from the professionals in this area for a variety of reasons. They may feel that they have a business to protect or some darker motives. People like me can run a fine toothcomb over the words in the document and draw inferences and implications that may be perfectly correct but are not as telling as real stories of financial pain So how can this evidence be collected, collated and presented?
The responsible Umbrella companies have been active in this process already and can and I’m sure have acted to bring their thoughts to the Government in the previous consultation. Given the role they have in this area, they are best placed to bring together the experiences and fears of individuals.
Alternatively stories can be collected in an external source (accountant, law firm, recruitment agency) and subsequently submitted from there. Why is this important? Because it will reduce the amount of income you receive. The proposal is that the currently tax free allowances for travel to and from temporary workplaces and for subsistence will be taxable in pretty much every case from 6th April 2016. The test is based on a very simplistic view of whether the work you do is “supervised, directed or controlled” by another person. Where this is the case, you will be treated as an employee of the engaging company and no tax free allowances can be paid.
The examples used in the document are frankly laughable. For example, a company wants an online catalogue of goods that customers can order from. If an IT contractor is given pictures of the goods and a price list, goes away and produces in due course a complete website with functioning order book without further reference to the company, he is self employed. Really? How can anybody actually imagine this is how commerce works? If that is an example of just how independent you have to be in order to retain the tax free allowances (at the expense of the normal employment law protections) it’s easy to see why HMRC consider that this measure will net them £635 million over the next 4 years.
How will this tax be collected? The proposal is that the company who engages your services or the umbrella or other intermediary will be responsible. I’m sure that both of these will have issues with taking on the responsibility, especially as penalties for non compliance are part of the package.
There is clearly a Government concern that some in this area are less than honest and as such it would not be impossible to see both entities have some responsibility and liability here. More worrying is the prospect of a repeat of the position many contractors find themselves in. Many used intermediaries to operate through from the late 1990’s. Despite HMRC making some vague and largely unnoticed warnings and failing to intervene, they are now issuing demands for several year’s worth of tax. It is arguable that the agency is at least partly culpable in the very tough position many now find themselves in. The consultation here carries no hint that HMRC should be given powers to intervene, if necessary closing intermediaries and taking control of tax deductions themselves rather than permit a continuation of what they know is illegal practices.
They do promise that their investigations and compliance checks will be stepped up, but given the usual pace of these, if there is a problem the guilty parties will be history long before HMRC arrive on the scene. For a great many people the dividing line between employment and contracting is already too difficult to arrive at an easy answer. For many the services offered by Umbrella intermediaries was the answer as the responsible operators in that market took great pains to ensure compliance. That certainty is going to disappear in April 2016. The tax situation around travel and subsistence payments is perhaps the thin end of the wedge and is those who engage your services understand this, they will become more wary of their potential obligations as employers.
The time to act is now.
There is a need to collect information on how these rules will reduce individual’s income, increase employer costs, lead to obligations and potential disputes and irreparably damage the flexible labour market. HMRC is already starting from the flawed premise that if you do the same work as a permanent employee, you must also be an employee.
Why? There is no logic in that proposition. AUCAE are looking to collate responses which should be should be completed online by 30 September 2015 at http://www.allumbrellacompaniesareequal.com/aucae-surveys.html.
All responses will be provide to HMRC and sent to No11. Downing Street by All Umbrella Companies Are Equal. Do not ignore this. Your Umbrella will undoubtedly help you if asked, but give HMRC your thoughts and views on how losing these tax free allowances will impact you.
Graham Webber is a Director of WTT Consulting Ltd, a tax enquiry resolution specialist firm which operates in the contractor sector. He can be contacted on email@example.com.