Contracting’s stakeholders are dismayed but unsurprised about the confirmation of restrictions on travel and subsistence (T&S) expenses relief for umbrella company contractors and contractors using personal service companies (PSCs).
This proved to be a black spot on an otherwise apparently trouble-free afternoon for contractors yesterday, as Chancellor George Osborne delivered his Autumn Statement and Spending Review for 2015 the.
The Government proceeded with its plans to abolish T&S tax relief from April 2016 for contractors engaged through an intermediary, despite fierce opposition from contractor organisations. Whilst it represents a substantial hit to the contracting workforce, commenters also anticipate it could have an adverse effect on the taxman’s take.
Contractors will feel relieved that the ‘blue book' does not legislate any further contractor-hindering changes to IR35, after media rumours circulated that contractors would be forced onto a payroll after just one month of engaging with a client, although announcements are now expected to instead be made in the coming weeks.
Travel and subsistence announcement “a betrayal of contractors”
The Government’s decision to go ahead with its proposal to deny T&S expenses relief to umbrella contractors and PSC contractors caught by IR35 was met with contention but also little surprise by relevant organisations.
“It represents a betrayal of contractors and places a huge burden on HMRC to implement a rigorous enforcement strategy,” notes PRISM CEO Crawford Temple. “The Government is walking blindly up an avenue that will net them relatively small sums - £265m by HMRC’s own reckoning - but cost stretched employers billions and penalise the most flexible workers.”
ContractorCalculator CEO Dave Chaplin also believes HMRC’s targeting is misguided: “Research has shown that large numbers of umbrella company contractors don’t actually claim expenses. Umbrella companies are also hugely efficient collectors of income tax and National Insurance Contributions (NICs), so the net impact will be a fall in take, not an increase.”
Chaplin’s argument is vindicated by the temporary travel rules. James Abbott, owner and head of tax at contractor accountant Abbott Moore LLP, notes that restrictions on travel and subsistence expenses are already in place for many contractors.
“Prior to the announcement, every contractor has been able to claim on travel, but once you work in the same general location for two years – or even expect to be engaging in a contract for two years – you can’t claim on travel. As such, many contractors who work in the city on a regular basis are already ruled out.”
T&S changes could be a lose-lose situation
As well as returning an underwhelming amount in revenue, Freelancer and Contractor Service Association CEO Julia Kermode raises concerns that removal of tax relief will have an adverse effect on other Government objectives:
“George Osborne says he ‘chooses to build’ and is ‘determined to boost the Northern Powerhouse’ but new homes and infrastructure projects are all reliant on the contingent workforce.”
Nonetheless, as it stands, T&S relief for the wider contracting sector looks set to remain, depending on HMRC’s ultimate verdict concerning IR35, as the Association of Independent Professionals and the Self Employed (IPSE) Chief Executive Chris Bryce notes:
“We have always been clear that changes to tax relief for travel and subsistence should not penalise freelance businesses. Today’s announcement suggests that these firms will still be able to claim, as can every other business, but this is very much dependent on the outcome of the Government’s IR35 review.”
Question marks still remain over IR35
The good news for contractors is that the suspected kneejerk reaction to HMRC’s IR35 discussion document didn’t materialise. The bad news is that the contingent workforce is still in a period of uncertainty over HMRC’s next move.
Whilst IPSE believe this represents promising signs that the Government has heeded the warnings of itself and other contractor organisations, George Osborne’s acknowledgement that he will look into “disguised remuneration” gives greater substance to other experts’ concerns that HMRC is simply biding its time.
For Seb Maley, Director of contractor tax consultancy agency Qdos, it could be an indication of plans to align IR35 with the ‘supervision, direction or control’ (SDC) test: “It is interesting that clause 3.20 of the ‘blue book’ only refers to IR35, rather than SDC. This could indicate that HMRC is intent on adjusting IR35 so it revolves around SDC alone, which is one of the key suggestions in its discussion document.”
Meanwhile, the announcement that HMRC is set to receive an £800m war chest for tackling tax avoidance and evasion, along with the introduction of a penalty of 60% of tax due added to the General Anti-Abuse Rule’s arsenal, shows that this is still an area of high priority for the Government.
“Whether HMRC is going to wait until a final decision has been made over IR35 before chucking more resources at it remains to be seen,” notes Abbott. “There’s nothing specific that I am aware of that they are going to attack with that £800m.”
Either way, contractors can at least now work in the knowledge that no major changes will be made to their working conditions as soon as April 2016.
Positive points for contractors
Construction contractors and other contingent staff working in the supply chain look set to benefit after the Chancellor pledged £7bn to fund the construction of approximately 400,000 houses UK-wide. The announcement comes in spite of a severe skills shortage in the sector, meaning contractors are likely to find significant demand for their services.
“This new funding could be the shot in the arm the construction industry needs,” notes Bryce. “The Government will be relying on the 800,000 self-employed workers who power the construction industry in order to get the job done.
Meanwhile, engineering and construction contractors received a further boost as a result of infrastructure plans. Transport capital spending – including HS2 - is set to increase by 50% to £61bn, to fund what the Chancellor calls “the largest road investment programme since the 1970s”.
“It’s clear that the self-employed do more business when they’re better connected. They need access to good, effective infrastructure to prosper, and to maximise their contribution to the economy,” highlights Bryce.
Another bonus for limited company contractors concerns corporation tax rates, as Abbott highlights: “This is a genuine area of tax reduction, which has already been announced, but is worth being reminded of. From April 2017, the corporation tax rate will drop to 19%, and then to 18% in April 2020, marking a 10% reduction.”
What other measures could impact contractors?
The announcement made over buy-to-let properties has been identified as one which will impact many contractors. The Chancellor delivered plans to increase Stamp Duty by 3% on all second and investment properties, which HMRC anticipates will raise £1bn.
“Although it doesn’t relate to a contractors’ business model, it is a common area for contractors to invest in, as many generate good incomes,” highlights Abbott. “This is a relatively peripheral matter, but I expect this to impact a significant amount of contractors.
“By excluding corporate investment, this is effectively an attack on small private landlords who have put their own money into providing homes that the nation so badly need,” Sat Singh, CEO of CMME adds.
There was a mixed reaction in response to the introduction of a 0.5% Apprenticeships Levy. Bryce identifies the Levy as something that could prove an effective means of developing the skillset of the next generation, but emphasises the importance of granting SMEs and the self-employed access to the funds.
However, Abbott raises concerns that umbrella contractors could indirectly bear the brunt of the Levy charge: “An agency workers’ income is effectively determined by what it costs the agency to pay them. If the agencies are having to pay an extra 0.5% on their payroll costs, the contractor is likely to be funding that 0.5%, as they will presumably end up with less as a result.”