Freelance workers tax loophole to be closed
Any of you guys working in construction under umbrella companies had better get talking to your "employers" over the next year....
Loophole that lets freelance workers offset the cost of their daily lunch and commute against tax to be closed in Budget
Tax break thought to be worth £400million a year
Self-employed use umbrella companies to claim for 'subsistence' costs
Recruitment firms lowering wages for some workers to pocket value of relief
A tax loophole that lets self-employed workers write off the cost of food and commuting to work each day against their tax is set to be shut in the Budget next month.
The tax break can be worth thousands of pounds to individuals, experts say, as it allows them to offset the cost of their home-to-work commute and as much as £10 a day for food against their income tax.
It works by classifying each place they go to work as a temporary work location, rather than as a series of permanent ones.
Closing the loop: Tax officials say the daily subsistence relief is worth £400million every year to workers.
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Closing the loop: Tax officials say the daily subsistence relief is worth £400million every year to workers.
HM Revenue & Customs launched a consultation on closing the loophole in December. Now tax experts expect Chancellor George Osborne to confirm the move in the Budget on March 18.
The taxman has estimated that there are 150,000 individuals potentially working in this way. The claims made by them for tax relief on their travel and subsistence are said to cost the Exchequer at least £400million per year.
How does the tax break work?
The tax rules allows all workers to offset subsistence expenses - such as travel and lunches - against tax if they have to travel to a temporary work location.
A work location is classed as temporary if the person works there for or no longer than 24 months. The location is not temporary if they work there for the entire length of their employment, even if this if less than 24 months.
A LOOPHOLE WORTH £1,726 A YEAR - BUT FOR HOW MUCH LONGER?
Offsetting food and home-to-work travel costs can be worth hundreds or even thousands of pounds a year.
For example, a contract worker earning £60,000 would normally pay £13,627 pounds in income tax.
If they drove the UK average 18.6 miles to get to and from work each day, and spent the standard 45p per mile to do it, they would spend £8.37 commuting each day.
If they worked 10 hours each day they could claim £10 for food.
Assuming they worked 47 out of 52 weeks each year, they would spend an annual £4,316.95 on food and travel.
Allowing them to write this off against their tax would lower their income tax bill to £11,900.22 - a saving of £1,726.78.
This has meant that most temporary or freelance workers cannot normally treat their workplace as 'temporary' for tax purposes, despite being their for typically less than 24 months. Instead they are contracted to work directly for each employer, and their entire employment takes place at that location.
However, recruitment firms have begun to structure the contracts of temporary workers and freelancers differently so that they can take advantage of the tax break available for temporary work places.
The recruitment company sets up an umbrella company in order to employ the freelance workers.
The umbrella company hires the workers on an 'overarching contract of employment', which means it is the umbrella company that is treated as their permanent place of work, with each work assignment treated as a temporary location.
This means the worker can claim tax relief for the cost of getting to work and food each day.
Some recruitment firms offer to run umbrella schemes for group of freelance workers in return for an administration fee - typically between £15 and £30 a week for each worker - so that the workers can benefit from the tax relief
However, some will hire temporary staff on this basis and then lower their pay by the value of the tax relief, meaning it is the recruitment firm and not the worker that benefits from the tax relief. This also means that less income tax and employer National Insurance is paid.
Why allow umbrella companies at all?
HMRC acknowledges that umbrella companies can be used legitimately by workers. Traditionally they have been used by skilled workers who source their work from multiple employers.
The umbrella company enables them to funnel all their affairs, such as tax and invoicing, through one route.
However, the market for umbrella company services has changed.
In its consultation on closing the daily subsistence loophole, HMRC said: 'In recent years, the market has expanded and those employed through an umbrella company now may have their work sourced through an employment business and be less skilled in nature.'
Will the tax break survive the Budget?
Tim Stovold, tax partner with accountants Kingston Smith, said: 'The consultation is neatly timed before the pre-election Budget Statement, due to be given by the Chancellor on 18 March 2015.
'I would normally interpret this as meaning that any announced changes in the Budget following the consultation would take effect from 6 April 2015. But the consultation document does say that any changes will “not come into effect until 2016 at the earliest, so there may be a period of grace before the ability for individuals working under overarching contracts to claim these expenses is lost.
'However, it is almost inevitable that the restriction over the claiming of these reliefs will apply from April 2016 as HMRC perceives this to be an area of abuse of the tax system.
Source
I mentioned this just the other week on here. This is HMRC responding to all these tax avoidance schemes that enable their rich clients to "avoid" millions per year in tax.....HMRC are clamping down on the low to middle earners while doing bugger all to the massive loopholes that exist.
Vanilla tax avoidance my arse lol. I know guys in construction who literally are being "bullied" into accepting being paid through this system. Personally I would never accept working under the scheme as it really stinks imho. LTD company all the way for proper self employment.......PAYE in the building/construction trades is almost non existent. Building companies hire trades through agencies....who are supposed to take people on as full time employed workers after 13 weeks.....they (employment agencies) get round this by using the above umbrella scheme - often owned by the agency themselves - they then make the worker pay Employers NI and employee's NI and any tax owing.......Finally the worker has to pay say £30 to receive his wages....It really is sick lol. The agencies "encourage" the workers to falsify their genuine expenses so that they can take home something more than min wage......absolutely stinks.
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Originally Posted by blacksheep
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