There have been ongoing attempts by HMRC to clamp down on the tax affairs of contractors who it believes are exploiting the tax system to reduce their payments. That’s evidenced by IR35 legislation and continues with effect from 6th April 2016 when changes to travel and subsistence expenses come into effect.
The Changes and Why They’re Being Made
One benefit of being a contractor is you claim all business expenses and offset them against income, thus reducing your liability for tax and NI. That’s a reasonable reward for the additional risks you take and costs you incur by being a contractor. It differs to permanent employees who can claim expenses when on legitimate company business but not those incurred when travelling between home and work.
Most contractors are based at their home address and can claim for all travel and subsistence expenses when going to client sites. HMRC has allowed this so far but, from April 2016, is clamping down on those contractors who fall within IR35 legislation. That applies to those subject to the supervision, direction or control of their client rather than undertaking a particular task in the way they choose. In other words, their work is managed to ensure it reaches the required standard, they’re made to work in a specific manner or are told exactly what to do in the same way as a permanent employee.
Such contractors will no longer be able to claim travel and subsistence for travel to their ‘normal’ place of work. However, in the same way as any other employee, they can still claim expenses incurred when required to go elsewhere on business. Any incorrect claims after this time will result in a liability for extra tax.
Effect of the Changes
If you work through an umbrella company, the company will be unable to claim travel and subsistence costs on your behalf if subject to supervision, direction or control from any clients. That will increase your personal tax liability and may cause many contractors to change from umbrella company to limited company operation.
Even if working through a limited company, the changes will still affect you if you’re deemed to fall within IR35 legislation for particular contracts. The outcome will be increased income for tax purposes, since you won’t be able to offset the same level of expenses, and a higher corporation tax bill.
This can have a serious impact on your profitability if you’re travelling to a client every day or have frequent overnight stays. If you’re suddenly unable to claim £5,000 of annual expenses, for example, this will increase your corporation tax bill by £1,000 and may also affect income tax payment.
You need to ensure, therefore, that your working arrangements aren’t caught by IR35 legislation, resulting in travel and expenses being not reclaimable. The best way to do this is to use the services of Phoenix Cloud Accounting, which will make sure you comply and operate in the most tax-effective manner.