Changes to tax rules could mean fewer tax deductions for contractors
Posted: Jun 10, 2016
Many people, especially in the IT business, work as self-employed contractors through a personal service company (PSC). This can create a tax-efficient way of offsetting tax liability by claiming certain expenses that would not be possible for a permanent employee doing the same job, and certainly until now tax advisors would have recommended taking advantage of the existing rules. One such expense is the cost of travel to a temporary workplace but one of the problems with this is that contractors often work for years, in many cases, for the same company making a joke of the term "temporary" workplace.
Also there is the related issue of employment agencies acting as umbrella companies for contractors who charge commission but the arrangement allows the individual to claim travel and subsistence expenses and offset these against their tax and National Insurance liability; taking advantage of this practice would have been considered good tax advice. Although, in practice, many times the individual would be financially better off setting up a small business as their own personal services company than using an umbrella company.
If a contractor uses an umbrella company then the location of that company is treated as the permanent place of work whilst the actual company receiving the services of the contractor is treated as the temporary place of work. The definition of a temporary place of work is one where the person works for no more than 2 years and for no more than 40% of their time.
The UK government is now considering changing the tax rules surrounding travel and subsistence expenses for contractors working on a temporary basis at a temporary location because there have been suggestions that there is abuse of the regulations. There will be a thorough, ongoing review of the situation but in the interests of finding a solution that can be implemented quickly there will be some interim changes.
These changes mean that the actual workplace could no longer be treated as temporary, but would be permanent whether the contractor worked via their own personal services company or via an umbrella company.
They would also mean that long term employment by one employer could not be disguised as a series of permanent contracts purely for the purposes of reducing a tax burden.
This would mean that a contractor working via a personal services company would not be allowed to treat their home as their permanent workplace and claim expenses for travel to the temporary workplace of their client's premises. This would certainly have a knock-on effect of discouraging the practice where contractors take up jobs far away from their homes because they know they will not, effectively have to pay for travel and subsistence and are, in all likelihood, going to benefit financially from such arrangements.
Naturally, there is another side to this coin and that is that certain areas of the country which lack skilled workers, again, especially in the IT industry, could find that they are unable to secure the expertise they need. And this is most likely to be in areas that are already suffering skills shortages so any changes could potentially exacerbate existing employment problems.
If you are a contractor in any industry then talk to a london accountants or to a tax advisor for the best advice on how this might affect you and also how you can contribute you views to the government about any possible changes that might affect you.
The author has written and published articles on a wide range of topics including Small Business Advice, Tax and Accounting, Interior Design, House Renovation and Project Management.