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Should UK Recruiters and Contractors be worried?

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Budget 2015 – what next for travel and subsistence rules?

With the Budget now less than a week away, contractors are looking on with interest to see what next steps the Government will announce regarding its plans to tighten rules on travel and subsistence reliefs for ‘overarching contracts of employment’. In an article originally posted on www.itcontracting.com , I shared my views on the Government’s proposals.

The Government’s stated intention so far has been to restrict what it sees as unfair practices through which tax relief rules are ‘exploited’. However, its objectives are clearly based on a fundamental misunderstanding of the realities of the contractor workforce. In reality, the new rules could unfairly punish a highly vibrant segment of the workforce.

Misunderstood intentions

Any new measures to expose and close loopholes used by unscrupulous operators should certainly be welcomed by all. Unfortunately, the proposals set out in the Government’s now closed discussion document haven’t done that, instead unfairly tarring all contractors and employment service providers with the same brush.

This flexible workforce now numbers almost 1.7 million individuals, and is acknowledged as a crucial component in helping us all through the recession. But the Government seems wholly unaware of the unique working activities and circumstances that differentiate contractors from permanent employees or traditional ‘temp’ workers.

Travel and subsistence reliefs for this workforce reflect a genuine need by individuals who are required to frequently and rapidly relocate for short term and usually relatively unsecure assignments. HMRC’s proposals would ironically unfairly penalise hardworking workers who have chosen to be contracted at a series of temporary workplaces.

All about the money?

The financial incentive for HMRC can’t be ignored in understanding its motivations. However, the belief that HRMC will be able to automatically recoup its £400m p.a. perceived loss just doesn’t stack up to scrutiny.

It’s widely acknowledged that this £400m is a gross figure – with no contingency made for the impact of contractors moving across to any new employment models.

HMRC also hasn’t fully considered the wider tax raising implications of contractors’ working activities. The extra fuel duty alone created by the contractor workforce almost entirely neutralises any loss to the exchequer through reliefs.

Closing travel and subsistence reliefs could actually reduce HRMC’s net take, as service providers are forced to look for new interpretations of the rules. This was exactly what happened with the closure of composite companies and onshore intermediaries legislation, after all.

A better approach would be to instead clamp down on the lax auditing and reporting of allowance claims. By really getting tough on unscrupulous operators, it’s not inconceivable that around half of the claimed £400m annual loss could be recouped fairly quickly.

Who will be hit?

If the current proposals are enacted without any amendments, the lower end of the market will be the most affected. For these contractors, reliefs are essential to making assignment working worthwhile.

Fortunately, with new legislation most likely not coming into force until 2016, there should be time for the industry to respond and provide alternative options for these workers. The real danger is that non-compliant providers may use the opportunity to create evermore inventive ways to abuse the rules.

This could make it even more difficult for legitimate service providers to compete with non-compliant offerings.

Balanced approach

Now is not the time for kneejerk reactions based on misconceptions of the contractor market. Instead, new legislation should actively support the vital contribution flexible workers make to our economy. After all, HMRC has stated that its goal is ensure that ‘arrangements that do not seek to exploit the tax rules are not affected’ by any proposals at Budget 2015.

So I’m hoping that I’m being overly pessimistic and that the Government will actually have listened to the counterarguments that were put forward during the discussion period. Until Wednesday, it’s a waiting game.