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Contractor expenses - could the Government be about to score an own goal?

Published on Aug 7, 2008 |

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One IT contractor news site suggests that the Government could be about to score a spectacular own goal with its plan to attack contractor expenses.

Dave Chaplin from ContractorCalculator told us:

"The latest consultation from the Treasury is asking whether contractors who work for umbrella companies as employees should lose their right to claim travel expenses. Our business models, based on nearly a decade of contracting industry experience, suggest that the net contribution to the public sector will fall if contractors lose their rights to claim for travel expenses."

The very real fear is that, faced with a loss of income as a result of having their travel allowances cut, contractors will their leave umbrella companies - which bring in huge sums of PAYE income tax, National Insurance Contributions (NICs) and VAT for HMRC - and start working through their own limited companies.

Chaplin has crunched some serious numbers to prove to the Treasury that their plans are flawed: "Contractors working through umbrella companies and claiming expenses typically pay 37% of their income in tax. Yet contractors outside of IR35 who operate via limited companies pay approximately 25% of their income in tax. Which would the Exchequer rather have? It seems crazy that they actually want to push people into paying less tax!"

And the government would not only lose out on direct payments from contractors, but forcing contractors to work through limited companies would also effectively destroy the umbrella company sector. The result would be thousands of jobs lost and recruitment agencies finding themselves with unsustainable large administration and bank charges that they simply don't have the capacity to handle.

"There are around 120 compliant umbrella companies employing 100,000 highly skilled flexible workers," continues Chaplin. "Shutting down 120 companies and putting thousands of people out of work - with the loss of PAYE income and corporation tax revenue - in order to claw back a spuriously estimated £300m in tax relief does not sound like a great deal for UK taxpayers."

The agency sector would also suffer as a result of tens of thousands more transactions. "Right now, the umbrella companies will send a single invoice to an agency on behalf of thousands of contractors. Then the umbrella company does what its core competence is and pays its workers what they have earned," says Chaplin. "Imagine thousands of invoices coming into an agency every week from contractors with their own limited companies? It would be an administrative nightmare and cost a fortune."