Why the T&S tax relief grab beggars belief

In light of the odd false start, it was pleasing to see thousands upon thousands of contractors respond to surveys on the government’s incoming measure to restrict tax relief on travel and subsistence expenses, writes Lisa Keeble, founder of Contractor Umbrella.

Even the most cursory glance at the multitude of responses recorded reveals that the vast majority of contractors say that they will be negatively impacted -- from a financial standpoint. However, it appears that they were all wrong:

“This measure is not expected to have any significant economic impacts.”

This is the message from the government in their policy paper. Officials go on to say:

“Those on low pay could benefit from this measure.”

What absolute nonsense. Contractors who were entitled to tax relief on their costs of travelling and accommodation will, if from April they are inside IR35 or under Supervision, Direction or Control, lose that relief from tax. How can this loss not have a significant economic impact? Either:

1. Contractors will refuse to travel the significant distances that they do now for a contract unless rates are increased accordingly (result: extra cost to the end-client)
2. End-clients will refuse to pay increased rates (result: cost to the contractor)
3. Contractors decide they are sick to death of the government strangling them with red tape so they take their skills abroad where they will actually be valued (result: cost to the contractor industry and the country as a whole)

And that’s just the possible adverse outcomes for high-end contractors in the financial and IT industries who actually have a hope of negotiating rate increases with agencies and end-clients. What about the low paid workers and the supposed benefit to them?

The T&S legislation was proposed, according to HMRC, because more workers were benefitting from tax relief on the costs of home to temporary workplace travel than the government had intended. Had the government actually bothered asking itself why that is the case? Maybe because legislation changes from the UK (and from Brussels) and an increasingly litigious society have combined to make employing people on a permanent basis too expensive? Maybe because society demands that everything it consumes be made as cheaply as possible and moving workers from your payroll bill to an umbrella company is a great way of saving money?

Whatever the reason, more and more workers are being moved, rather than voluntarily deciding, from permanent employment to umbrella companies or in some cases to PSCs. The answer from the government that it wants “higher pay, lower tax, lower welfare society” is not to prevent companies from effecting this move, but to make sure that the poor individuals who are on the receiving end are worse-off as a result. For instance, construction workers who found themselves paying Class 1 National Insurance Contributions rather than Class 2 and Class 4, as a result of the intermediaries legislation, will now see their take-home pay drop again. How long can it be before those workers think enough is enough and turn to the welfare system for help supporting their families? Not long I’d wager.

I’m unsure if anyone in senior government has actually ever held down a proper (commercial) job but it seems unlikely. My reasoning is this -- they appear to have no idea whatsoever about how the business world works. Let’s be clear for any senior mandarins, policy-makers, quango bosses and tax officials reading: this new legislation restricting T&S tax relief for the flexible workforce will not persuade big businesses to put workers on their own payroll, especially with the Apprenticeship Levy looming large.

If anything should be more obvious than that to Whitehall rule makers it’s that the temporary workforce is only likely to increase over the next couple of years. So all this legislation banning tax relief on T&S relief for temporary workers will achieve is to ensure that low paid workers will be worse off and high-end contractors will be either less available or more expensive for business, as per my three outcomes earlier on. It really beggars belief.

It’s true that workers have the option to move to a PSC and, if they’re not subject to IR35, this incoming legislation won’t affect them. But also true, and what probably hasn’t occurred to this unaware and uninformed government, is that they’ve just given a huge incentive to workers to declare themselves outside IR35 when they’re actually not. I wonder if ministers will be giving a huge budget increase to HMRC to help them deal with the fallout from this likely uptick in false self-assessing of IR35? I guess not.