The contracting market faces another storm as the Government this week issued a consultation paper which considers whether to withdraw the tax relief available to temporary workers who incur travel and subsistence expenses. Workers ‘genuinely in business on their own account’ and working through a PSC can breathe a sign of relief as the Government acknowleged that, since they are taking financial risk in running a business, the ability to offset expenses is still available.
The paper had some clear messages:
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it is unfair that temporary workers get tax relief on expenses not available to employees;
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some umbrella companies abuse the travel and expense rules to maximise earnings;
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the Exchequer has suffered a substantial loss as a result of abuse (£300m in 2007/2008).
As a result, the Government has set out two possible options to tackle these issues:
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Allow existing arrangements to continue but introduce legislation to tackle abuse including the introduction of debt transfer for non compliant umbrellas. Those service providers that have advertised ‘generous dispensations’ or the ability to legally ‘get you more expenses’ may find themselves hit hardest by HMRC’s compliance activities. Since PayStream’s umbrella expense policy is on a receipts only basis, we feel confident at this stage that we will weather the storm well.
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Remove the entitlement to tax relief for travel expenses from umbrella companies and employment agencies altogether. This option may be preferred by Government since it is most likely to raise revenue. At a time when HMRC resources are being stretched, this may also be a simpler approach as it would mean that HMRC would not need to test whether dispensations are being abused.
The Government will consult with interested parties until 13 October 2008 and will announce its decision in the Autumn. If legislation is to be enacted it will be effective from the tax year beginning in April 2009. Over the coming months, PayStream will engage with HM Treasury to encourage a practical and workable outcome for our umbrella workers and agencies. We will update you when any new developments arise.
For now, we advise putting on your waterproofs and keeping an eye on the horizon. We will, of course, continue to keep you updated on developments using the staightforward approach we used when the MSC legislation was developed in 2006.