The forthcoming changes to travel and subsistence expenses for contractors is a topic that we have already talked about, but it’s so important for our industry that we want to further explain what is happening.
Seeing the wood for the trees
I was reading an article this week, published by another umbrella company, and whilst I’m not going to copy it, I think it is well worth repeating. Don’t worry, we’re on friendly terms so I’m sure they won’t mind.
There has been an awful lot of publicity around the expected restrictions on contractors claiming tax relief on their travel and subsistence expenses and in all the fuss, we’ve missed something.
Salary sacrifice is no more
Umbrella companies in their current guise provide their contractors with tax relief at source so they immediately benefit from an increase in income by offsetting their expenses on a regular basis. This is normally done on a salary sacrifice basis, so in effect the contractor is sacrificing a proportion of their income to be paid as tax free expenses. However (and it’s a big however), from April 2016, salary sacrifice arrangements are effective outlawed.
So, even if there were not going to be any changes to the Travel and Subsistence rules, all contractors will see an immediate drop in their income with effect from 6th April 2016 as the umbrella company in effect becomes a payroll bureau. Tax relief on expenses, if the contractor still qualifies under the SDC rules we’ve written about at length, will only be granted via their end of year self assessment tax return.
So who’s going to assess SDC
Many umbrella providers have been speaking about the potential impact of the SDC proposals and how they will be policed in the real world. If we actually think about it, this is odd as the legislation that will restrict expenses will come into effect on the same day that stops umbrella companies providing ongoing tax relief at source on those very expenses.
This means that it is not actually relevant to the umbrella company, whilst the worker is on assignment, if they are under the Supervision, Direction or Control of anyone in the contractual chain! The only time it becomes relevant, is when the contractor (or their agent) completes their tax return.
So what will an umbrella company actually do?
In effect, whatever happens with the rules around T&S expenses, from April 2016, all compliant umbrella companies will become payroll bureaus – however they will still provide a valuable service for agencies and clients.
We need to remember that when umbrella companies first came into existence, they were not set up as tax saving vehicles – that was an added benefit. Umbrellas will still provide recruitment agencies with the peace of mind that their workers are compliant, have the relevant insurance in place and protect them from potential employment liabilities. They will continue to relieve agencies of the administration burden that providing PAYE entails and mitigate costs. In addition, many umbrella companies also provide added value services for their contractors and this should continue.
These have always been the key benefits of using umbrella companies for recruitment agencies and clients and will remain so.
It is now more important than ever for agencies and hirers to enter into dialogue with umbrella providers. There will be plenty of schemes appearing that promise to avoid the legislation and still give workers tax benefits however it is our belief that these schemes will be attacked immediately.
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Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.