The clampdown on travel and subsistence expenses has been included in the Finance Bill 2016, and is expected to impact 430,000 contractors according to HMRC estimates.
This draft legislation will put in place the measures announced by the Chancellor during the Summer Budget, as well as November’s Autumn Statement.
Here we look at the changes which will affect the contracting industry, starting with the main announcement – the clampdown on travel and subsistence expenses by (primarily) umbrella company workers.
Which contractors are affected?
As a result of the new legislation, which will take effect from 6th April 2016, certain groups of workers will no longer be able to claim tax relief on travel and subsistence expenses, specifically:
- Those employed via umbrella companies (employment intermediaries).
- If you personally provide services to another person.
- The draft legislation confirms that limited company contractors are not affected by this new restriction, except for any contract work they carry out which is caught by the IR35 rules.
What is the likely impact of these changes?
The Treasury says it expects to raise between £145m and £175m each year over the next four years as a result of the clampdown and states that the new rules will not “have any significant economic impacts.”
The restriction on claiming travel and subsistence expenses may result, the document states, in “small changes to the labour market, including decreases in the use of umbrella companies and increases in the use of other types of employment intermediaries.”
Despite its claim that the new legislation will only have a ‘significant’ impact, HMRC still expects around 430,000 workers to be affected over the course of a year.
You can read more about the background to this restriction in our summary article.
What other measures are included in the draft Finance Bill
Although non-IR35 limited company contractors are not affected by the expenses clampdown, almost all will pay more tax from April 2016 onwards, as a result of the new dividend tax rules.
- The dividend tax credit will be scrapped, and replaced by new dividend tax rates, which will cost the majority of contractors thousands more each year.
- Further action will be taken against users of disguised remuneration schemes.
- The Government will take on board most of the Office of Tax Simplifications’ recommendations on employment status.
- The pension lifetime allowance will be reduced to £1m from April 2016. The Government is also looking into the current system of pensions tax relief to see whether or not it incentivises saving.
- The Bill confirms that ‘digital tax accounts’ will be implemented over the course of the current Parliament, for all businesses.
What about IR35?
Importantly, the Government is currently reviewing the operation of the IR35 rules, following publication of a draft consultation document back in July. Although we now know that no new IR35-related measures will take effect from April 2016, it is possible that the Government may wish to make changes in the near future.
You can read a summary of all the main changes included in the Finance Bill here.