Tax & Accounting News

Contractors Await Verdict on Travel Expenses

11/11/2008

Contractors and freelance employees are anxiously awaiting the outcome of a government consultation on their travel expenses.

The consultation, which closed on 13 October, has the potential for far-reaching consequences for temporary workers and umbrella companies and agencies through which they operate.

At present, temporary workers operating through an umbrella company or agency, using an overarching employment contract, can claim tax relief on their travel expenses. The umbrella company or agency is able to apply for an HM Revenue & Customs (HMRC) dispensation to make these payments free of tax, with no reporting requirements.

HMRC is keen to tighten up on abuses of such arrangements, including situations where employees receive a significant part of their income from their employer in tax-free expenses, regardless of what work they have carried out.

The consultation proposes two broad options for action – allowing existing arrangements to continue, with new legislation to tackle non-compliance; or scrapping entitlement to tax relief for travel expenses for umbrella companies and employment agencies using overarching employment contracts.

However, the contractor industry has warned that action by HMRC could backfire badly. Dave Chaplin, chief executive of ContractorCalculator, a leading UK website for contractors and freelancers, which has researched the potential impact, says: “If you take an average contractor working through an umbrella company and take away their travel expenses, the taxman will get less than £3,000.
“If tens of thousands of contractors decide they will make more money using their own limited companies, of course they will take that option and the net result will be very much less for the Treasury.”

The government may indicate its thinking on the issue in the 2008 Pre-Budget Report, the date of which has yet to be announced, although with time ticking away, it seems likely that it will be early 2009 before a clearer picture emerges.

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