In 2015, the UK government announced as part of its newest budget changes for the umbrella payment method that allows employees to claim tax relief for travel and subsistence expenses.
How will these changes, which will take effect in April 2016, affect independent contractors in the freelance labour market?
Removal of Travel and Subsistence Allowance
The government intends to modify travel and subsistence tax relief for contract contractors such as those compensated via umbrella payment methods.
The umbrella payment method involves a company (called an umbrella company) that acts as an employer to independent contractors. Unlike a pay-as-you-earn (PAYE) arrangement that withholds tax on payments to workers, the umbrella payment method may offer immediate tax relief for certain travel and subsistence expenses, such as home-to-work travel. This relief is not typically available to permanent non-contract employees.
The government proposes to evaluate tax relief that umbrella payment methods offer. Her Majesty’s Revenue and Customs (HMRC) propose to remove tax relief for home-to-work travel and subsistence expenses for independent contractors subject to “supervision, direction or control” by the client company.
Reduced Take Home Pay
If a contract employee has previously claimed tax relief for travel and subsistence expenses, reduced take home pay is likely in 2016.
A contractor reimbursed via an umbrella payment method will no longer be able to claim tax relief for some travel and subsistence costs, and this loss is likely to reduce take home pay.
Nevertheless, not all travel tax relief will be disallowed. For example, a contractor who travels to London daily from Slough will not be able to claim tax relief for this travel, but if that individual travels to Liverpool for a one-time meeting for the client, under the new rules the cost of this travel may be acceptable as a travel expense with tax relief.
Increase in the Use of Personal Service Companies (PSCs)
A personal service company or PSC is a contractor who may or may not be working under the “supervision, direction, and control” of a client.
Those contractors who can show they do not work under the “supervision, direction, and control” of the client may see few if any changes as of April 2016.
However, considerable uncertainty remains about the exact changes the new policies might have on highly skilled and highly paid contractors.
Under the new plan, a contractor under the “supervision, direction, and control” of the client is required to receive pay-as-you-earn (PAYE) wages as if the worker were employed directly by the client. However, if the contractor is not what the government terms a “disguised employee” the use of an umbrella payment method may continue to deliver substantial tax advantages, especially when compared with direct employment by the client.
A contractor who believes his or her company is one that HMRC would label a PSC (and most contractor companies qualify) should act immediately to confirm an unarguable status as a self-employed professional wherever possible.
Increase or Decrease in Tax Avoidance?
Ultimately, it is impossible to predict the end result of the new policies where tax avoidance is concerned.
For independent contractors, it is worth noting that HMRC promises the following: “The government will invest additional resources . . . to tackle evasion, avoidance, and aggressive tax planning . . . by large businesses.”
Therefore, those independent contractors who serve large businesses and receive tax allowances through umbrella payment methods may be targets for particularly close scrutiny.
In addition, Britain’s Chancellor of the Exchequer George Osborne has promised investigators £800 million of extra funding over the next five years to combat tax evasion; the government has allocated £60 million for serious and complex tax-crime investigations; and HMRC has promised another £300 million for investigating diverse entities including small businesses.
Given this scenario, tax avoidance in 2016 may be riskier than ever.
- The beginning of the end for personal service companies in the UK? (2015, July 23). Employment Law World View.
- Bowers, S. (2015, July 8). Budget boost for HMRC in new push on tax evasion. The Guardian.
- Brett-Matthewson, D. (n.d.). A guide to personal service companies. Contractor UK.
- Budget 2015 “to restrict, not remove, contractor expenses.” (n.d.) Contractor UK.
- Changes to travel and subsistence expenses for contractors. (2015, March). SJD Accountancy.
- Employment intermediaries and tax relief for travel and subsistence (2015, July 8). Her Majesty’s Revenue and Customs.
- Guidance—Summer budget 2015: HM Revenue and Customs overview (2015, July 8). Her Majesty’s Revenue and Customs.
- The impact of the budget on umbrella companies. (2015, April 1). Datum Pro.