The time to tinker has passed by Paul Gough

Self Assessment Tax Returns

George Osborne’s Budget announced his five year plans to phase out Self Assessment Tax Returns for individuals and replace them with a single digital tax account. Sounds like simplification at its best! I am delighted that the Chancellor is content to expect taxpayers to embrace responsibility for a role currently performed by professional advisers.

To desire the accurate collation of information about income and allowances applicable to individuals in a central, secure, digital account is not without merit. But is it realistic? Are we more likely to get this from HMRC or the tooth fairy assisted by the Easter bunny?

I delight in the thought of banks and investment houses automatically disclosing interest and dividend income from an ‘electronic tax voucher’ linked to the digital tax account of taxpayers. I can even imagine a time when employers accurately return earnings figures (under RTI style reporting), into a system under the control of HMRC that is ready in time to meet the reporting dates and successfully ‘does what it says on the tin’.

In the unlikely future event that workers are allowed to claim tax relief on any expenses they incur in travelling to or from a place of work, or in the performance of their duty, then I’m sure that it’s possible this suite of simplifications can be combined in an unambiguous easy to use, infallible Government system. It would be a new system without uncertainty; a system of clarity and precision; one that is equitable to all and truly does ‘level the playing field’. But is this probable?

Am I merely being a Luddite with no ability to clearly see the future? Looking back over the last few years I can see a host of employment status related legislation that does not fill me with confidence. Failed attempts at simplification which make me think that whatever the Chancellor dreams of, tax advisers will continue to be very busy as they help prepare and submit personal tax information for others.

Tell the office no holidays …… I suspect the same is true for HMRC.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Travel and subsistence: It’s robbery

The taxman is claiming that Umbrellas are trying to steal from him, but is it the other way round? Travel and subsistence: It’s robbery

HMRC is trying to reach the conclusion that overarching contracts of employment (OAC) are a form of underhand scheme designed by shady Umbrella organisations and other non-compliant employment intermediaries to avoid paying an estimated £400m in Income Tax and National Insurance.

There is no doubt that modern employment models have moved on since the original tax legislation was first drafted, but subsequent tax changes have simply not kept pace with current practice.

Nevertheless, for HMRC to contemplate removal of tax reliefs on previously acceptable expenses, which they introduced, based on an argument that too many people may be benefiting, is a poor argument that will not protect the interests of the vulnerable and lower paid.

Following the issue of a discussion document in December 2014 HMRC invited comment from stakeholders in the temporary labour market, to help the Revenue determine if some end hirers, agencies and Umbrellas, pressurise temporary workers to operate under OACs which in turn allows them to make claims for home to work travel costs that would otherwise be ‘normal commuting’ in order to reduce overall tax payable to HM Treasury.

What is really interesting is the reasons that HMRC have stated as to why they believe contractors should not be entitled to claim travel and subsistence from home to their place of work:

  • “It’s not fair” on other taxpayers who cannot claim, as these other taxpayers are effectively subsidising abuse.
  • “We want to level the playing field” and treat all taxpayers in the same manner
  • “Technically flawed planning schemes” being deliberate abuse especially of the vulnerable workforce.
  • “Because the Treasury wants to collect more tax” – to reduce public borrowing we could always collect more tax.

It seems most likely that if all of the reasons why HMRC want to change the rules are placed in order of importance, then the final one is the biggest driver and therefore highest priority, as they themselves confirmed. The remaining issues are the political justification for a very unpopular and ill-considered project.

Technical highlights

When a worker travels from home to their place of work, the primary assumption is that this is normal commuting and tax relief for the costs of travelling or subsistence is not allowable. However, legislation provides for an exception to this restriction if the travel is to a ‘temporary’ place of employment, rather than a ‘permanent’ one.

This ability (under certain circumstances) for the existence of an OAC to transform what would otherwise be a permanent workplace into a temporary one is what creates the tax relief for expenses.

Other types of workers not engaged under an OAC (permanent, or short term agency contracts), could sit next to an Umbrella worker, may make the same journey from home to the same place of work and are not able to claim tax relief for their travel costs. So there is a moral justification and a case for symmetry of treatment but that only carries weight if one assumes the risks, responsibilities and rights and obligations are also the same for differing types of worker. Which they are not…

HMRC wish to collect £400m more in taxation, remove this inequality, level the playing field and stamp out tax avoidance…and protect the vulnerable worker’s rights and income! (It is not disputed that within this figure some non-compliant business models exist, which rely upon an aggressive interpretation of how the tax laws should be applied. They may fail under anti-avoidance legislation and remain a legitimate target for HMRC.)

The alternative options suggested by HMRC to collect this tax are also open to comment and may even be extended to include personal service companies (PSCs). Today’s main targets seem to be Umbrellas and tax avoidance scheme users; tomorrow’s may well include an attack on the independence of PSCs and small businesses.

If we assume that the estimate of tax loss from HMRC is indeed correct at £400m and HMRC outlaw current tax avoidance models and legislate to make all travelling from home to work under OAC non tax deductible, who will be the losers?

Any increase in the tax take has to come from somewhere. Will contractors and temporary workers in general, but especially at the lower skilled end of the market, be able to afford this additional burden? Will they be able to pass it on to their employer (the Umbrella)? Will the Umbrella be able to pass it on (via the agency) to the end hirer?

Will UK plc be willing to pick up the costs of an extra £400m and in doing so accept this hit to their profits? If they do, the taxable profits of UK plc will fall by the same amount and reduce the tax they pay by approximately £84m…I’m not convinced.

Umbrella v Limited – what’s right for you? Understand your options and contract with confidence. Contact us  to discuss your options.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Expenses and disbursements

Expenses and disbursements – what’s the difference?

As a contractor you may incur costs in the process of supplying services to your clients. Where the costs are relevant you can pass these on by including them in your invoice. If you are VAT registered it’s important to understand the difference between HMRC’s definition of ‘expenses’ and ‘disbursements’ to ensure:

  • your invoices to clients show the correct VAT treatment
  • you are only claiming back VAT on allowable items

 

Expenses

For invoicing purposes you must charge VAT on expenses you pass on to your clients.  If you are using the flat rate VAT scheme you must also pay a percentage over to HMRC as you would with a normal invoice, so you may want to consider whether it’s worth staying on the scheme if you have a large amount of expenses.

 

HMRC defines expenses as ‘incidental costs that your business might incur’ when supplying goods or services to clients. These include goods or services purchased for your own use as a normal business cost. The key point in the definition is that a cost is defined as an expense only if you have not purchased the goods or services on behalf of your client, for the client’s use and benefit.

 

HMRC examples of an expense are:

  • Travel to visit a client or travel to a job
  • Postage costs when sending items to clients

 

If you have incurred expenses you can choose to itemise these separately on your invoice as ‘recharges’. These are subject to VAT. You will have to charge VAT on these even if you yourself did not pay VAT on the items.

 

You can claim back the VAT on items you purchased for you and not your client, even if you passed the costs on as a recharge. You must provide a VAT invoice for each item you claim. Your client can also claim back the VAT you charged them on your invoice if they are VAT registered.

 

Disbursements

For invoicing purposes costs incurred for disbursements are left out of the VAT calculation.

 

HMRC defines disbursements as costs you incur when buying goods or services on behalf of your client, for their use and benefit. In this respect you are deemed as acting as an agent for your client.

 

For the cost to be a disbursement it must be clear that the purchase was made on behalf of the client and must include the following HMRC criteria:

  • you paid the supplier on your customer’s behalf acting as the agent of your client
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your client’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are additional to the services you’re invoicing your client  for performing yourself

 

If you paid VAT for goods and services you purchased on behalf of your client and treated it as a disbursement on your invoice you cannot claim back the VAT. Your client can only claim back the VAT if they have a valid VAT invoice.

 

In many cases the difference between an expense and a disbursement will be quite clear. However, if you are unsure of the correct VAT treatment for any items, contact your contractor accountant for guidance.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.