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Contractors Could Lose the Ability to Claim Tax Deductions for Travel

January 2015

A potential clampdown is on the cards for all those who work via their own Personal Service Companies. Contractors could lose the ability to claim tax deductions for the cost of travelling to and from their clients’ premises.

The government has stated that certain employment agencies and Umbrella Companies are abusing the current rules for claiming tax relief on travel to temporary workplaces. In many cases the tax relief the worker receives is cancelled out by the fee the worker is obliged to pay the employment agency. Ultimately the worker is worse off than if he/she were in a direct employment contact.

The details of contracts do vary, but in general the Umbrella Companies employ the worker on an overarching contract of employment; this means the umbrella company’s address is classed as the workers permanent address, and each work placement is classed as a temporary work place. The worker can then claim, and be reimbursed, expenses for travelling to each work placement plus “per diem” subsistence costs. Part of the worker’s wage may be treated as reimbursed travel costs (using salary substitution), so PAYE and National Insurance is not applied to that part, saving tax for the worker and the Umbrella Company.

A temporary workplace is loosely defined as a workplace which the worker travels to for a period of no more than 24 months. If the worker works at one place for his entire employment contract, that place cannot be classed as a temporary workplace, even if the employment contract is for less than 24 months.

The government is undertaking a wider review of all the tax rules for travel and subsistence expenses, but this may take several years. For now, the government wants to focus on blocking the perceived abuse of the travel and subsistence rules and has suggested two alternative fixes:

  1. To specify that where an individual is supplied through a third party, including a personal service company, the workplace of the end client would in all cases be classified as a “permanent workplace”.
  2. To stop treating overarching contracts of employment as giving rise to a series of temporary ’employments’ under a permanent contract for tax purposes.

The government acknowledges that these changes will have an impact on skilled workers that operate through Personal Service Companies, and has asked for views from the contractor community and their advisors.

The consultation is open until 10 February 2015, and the government’s decision will be announced as part of the Budget in March this year. Any resulting changes to tax rules will not come into effect until 2016 at the earliest, and thus will be dependent on the outcome of the general election.

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