How will the new tax year affect IT Contractors and Umbrella Companies

Changes to UK legislation and Budget 2016 around contractor expenses and proving employment status is set to alter the way umbrella companies and IT contractors work together from April 2016.

On 16 April 2014, the HMRC published a document called "Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses” and this outlined the coalition Government’s plans to clamp down on the misuse of travel and subsistence rules.

As of 6 April 2016, any workers employed by an umbrella company or a limited company director working inside IR35 can no longer claim for travel and subsistence costs as expenses and incur tax relief on these costs.

These restrictions will only be in place for workers who are under the SDC (Supervision, Direction or Control) of their end-client or are essentially working inside IR35.

Contractors working outside of IR35 will not be affected by the proposed changes. However, limited company directors, which are already deemed ‘caught’ by IR35, will not be able to claim tax relief on their expenses in the same way as they have previously done.                                 

PROBLEMS CONTINUE...

Another problem with the coding out is how the tax is assessed. To calculate an accurate restriction in the code number, the following three pieces of information need taking into account:

•    The contractor’s total income for year and whether they will be basic rate/higher rate/additional rate taxpayers

•    The contractor’s salary for the year

•    The contractor’s dividend for the year.

Ominously, HMRC will be working with information on the 2015 tax returns that will be more than a year out-of-date when preparing the 2016/17 code numbers. It will also be unclear to contractors exactly how the dividend restriction has been calculated. Matters will be further complicated by the fact that, if a contractor is taxable at 7.5% on a dividend and PAYE is collected at 20%, the amount of the restriction to collect the dividend tax will bear no relation to the actual dividend being taxed. Worse still, the code numbers that we have seen thus far neglect to explain how the restriction has been calculated. Contractors should, therefore, ask their umbrella company or advisers for assistance if they receive a code they do not understand so that it can be checked.

Also contractors working in the public sector will face investigation by their public sector clients to ensure their tax affairs are in order from April 2017, following a consultation. This is one measure in a raft of tax evasion and tax avoidance policies designed to generate an additional £12bn in tax

Pay Group Chairman Eugene Lantry commented about the changes as follows:

“Insulting to Contractors? 

The Chancellor of the Exchequer has little respect for the UK Contracting Industry.

Headlines regarding crack-down on avoidance are not appropriate to those self-employed, Limited Company or Umbrella Contractors who go about their business in a correct and compliant way.

This suggestion that avoidance is a dirty word does not wash well with me and is insulting to the hundreds of thousands of contractors that oil the economy of UK Plc with their hard work, independence of spirit (now sadly lacking in many others), and their dedication to providing a service to their clients.

HMRC are tax farmers who are told by their political masters to collect an amount appropriate for the latter to spend it. Like all tax farmers they will flog those parts of the economy that they see as an easy touch and where they can maximize returns.  Obviously they place Contractors in this Category. It makes for good media coverage.

All it takes is a concerted effort to show HMRC to be incorrect.

There is nothing improper for Contractors being self employed with their place of business at home and claiming every expense they wish travelling from their place of business – their home – to their clients’ place of business.

And it is also the case with Limited Companies. Your Limited Company can be registered at your home. It is where you do business from. All legitimate business expenses may be claimed. If not then challenge it. Contractors need to stand up and challenge more. Let’s see what HMRC will do with thousands of claims.

It is high time that the Recruitment Industry and Contractors unite to hit back at high handed efforts being made by HMRC to tie us up in very inappropriate red tape and repeated suggestions that Contractors can be squeezed for more taxation. “

WHY NOW IT IS THE BEST TIME TO START WORKING WITH AN UMBRELLA COMPANY?

A month before Chancellor George Osborne’s tax budget speech, the Financial Secretary to the Treasury, Osborne’s colleague David Gauke, said: “Umbrella companies have been a part of the UK labor market for many years and, when operated responsibly, provide a useful conduit through which payments, including tax, can be made.” announcing governments general support of the umbrella model as a mechanism for efficient tax collection.

In a nutshell, Umbrella companies support contracted workers by taking care of all the administration that comes with payroll, PAYE and taxes, invoicing and getting clients to pay; even insurance cover for contractors in the workplace. An umbrella company takes care of all this and removes the stress that comes with it. So that the contractor can concentrate on what they do best this is their day job. Perhaps more importantly, contractors who work with umbrella companies can take advantage of tax deduction/ efficiencies around expenses. In this case it is very important to select your payroll company wisely.

The example below demonstrates how we expect these changes to take effect:

Contractor A is working as an umbrella company contractor. Their contract is located in London and they travel London daily for work, under the proposed new rules they will not be able to claim the cost of travelling to this location as a business expense. However, if they need to travel to Manchester for a one-off business meeting, as this is not their regular place of work they will be able to claim this cost as a business expense under the new rules.  

Please be aware that expense claims are often decided on a case by case basis so we would always recommend speaking to your umbrella company about your individual situation.

Our advice at “Itcontractorsuk” is for contractors to be aware of the changes, ask the right questions and consult your umbrella company. Umbrella companies may themselves also look to take on tax investigation cover during this time as the new legislation throws up uncertainty.