The Chancellor Alistair Darling earlier this week delivered his Pre-Budget Report entitled “Supporting people through difficult times” to the House of Commons. This article considers whether, from a contractor’s point of view, the measures announced are indeed supportive, and considers in particular:

• Tax relief for travel and subsistence expenses.
• Income shifting
• VAT changes

Travel and subsistence expenses for umbrella workers

The Government has long been concerned that certain umbrella companies were abusing the travel expenses rules by encouraging workers to claim for expenses that were not genuinely incurred or for which no tax relief was due. The Government subsequently warned that it was considering various options to deal with non-compliance including removing the tax relief for umbrella workers altogether.

Following a consultation period with interested parties about what should be done to tackle non-compliance, the Chancellor Alistair Darling announced that, “the Government has decided to leave the current rules unchanged. However, in light of evidence from the consultation confirming poor levels of compliance in this area HMRC will refocus its efforts to ensure that the current regime is properly applied. If compliance does not improve, the Government may return to this at a later date.” 

This is good news for umbrella workers generally and for compliant umbrella companies who provide a valuable service to HMRC in collecting PAYE and NIC contributions for HMRC. Credit should be given to trade bodies such as ATSCo (on behalf of agencies) PCG (on behalf of workers) and The Service Providers’ Association (on behalf of umbrellas) who lobbied hard to ensure that the whole industry should not be punished for the non-compliance of a few.

We can now expect to see more activity from HMRC in weeding out non-compliance in the industry. A logical place to start is with those umbrella companies who market dispensations (intended to save administration for workers and for HMRC) as tax saving devices. We may see dispensations amended or withdrawn by HMRC. In extreme cases the dispensations may be withdrawn retrospectively with the umbrella company and/or the worker asked to account for the additional tax that would have been due if the dispensation had been operated properly. PayStream contractors need not worry in this respect since we do not operate a dispensation and because we request and check receipts, we can prove that expenses have been properly incurred.

The future: What will this mean for umbrella workers?

It is business as usual with the caveat to avoid non-compliant providers. 
 

Income shifting

The Government believe in promoting fairness in the taxation system. Its stance is that if an individual earns income he/she should be taxed on that income. This is undoubtedly a legitimate stance to take. It is also legitimate for two people to set up a business and to split the profits as they see fit notwithstanding that one does more or a different type of work to the other.

These two principles were tested when HMRC tried to tax dividends paid to a spouse as her husband’s income in the well known Arctic Systems case. The taxpayer won the case and immediately following the decision the Government announced that it would take measures to stop the practice. It was widely expected that legislation would be introduced in the Finance Act 2009 to try to restrict it.

However the Pre-Budget Report stated that “The Government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax, known as income shifting. The Government has consulted on this issue but, given the current economic challenges, the Government is deferring action and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review.”

What will this mean for contractors with second shareholders?

It means that for at least another year Arctic Systems is good authority that payment of dividends to second shareholders is a legitimate method of tax planning.

VAT Changes

The Chancellor reduced VAT from 17.5% to 15% with effect from 1 December 2008 until 31 December 2009. Alongside the temporary reduction of the standard rate of VAT, the sectoral rates of the VAT Flat Rate Scheme were amended.

By way of reminder the VAT Flat Rate Scheme allows a business with a turnover less than £150,000 to simplify its VAT accounting. Rather than calculate input and output VAT in the ordinary way, an engineer may for example simply pay 11.5% (or 10% from December) of his turnover to HMRC.  

The new flat rates are not calculated by reducing the old rate by 2.5% or any standard percentage. Rather the flat rates have been reviewed to ensure that the percentages reflect the VAT actually paid by businesses in the same sector who are using normal imput and output accounting. So although on the face of it some workers such as social workers will be worse off (VAT reduced by 2.5% whilst flat rate reduced by 0.5%) HMRC would argue that the change simply ensures that there is no distortion of competition between flat rate scheme users and others.

The short timescale given to make the VAT changes will no doubt cause invoicing problems for many PSCs, accountancy providers and agencies as they try to make the necessary changes to their IT systems. This may result in incorrect invoices being issued and even late payments.

Other points to note

• Planned 1p rise in corporation tax has been postponed (good news for PSCs);
• A new additional higher rate of income tax of 45% for those with incomes above £150,000 from April 2011;
• Fuel duty to increase by 2p per litre from 1 December 2008;
• Increase in the employee, employer and self-employed rates of national insurance contributions by 0.5% from April 2011;
• A new HMRC Business Payment Support Service to allow businesses in temporary financial difficulty to pay their HMRC tax bills on a timetable they can afford.