Clampdown on travel expenses for contractors

Around 430,000 contractors are likely to be hit by this year’s clampdown on travel and subsistence expenses. Cuts to the amount of tax relief you can claim could potentially have an impact on the way you do business and how much profit you can make. We take a look at who is affected and what it means for you.

New rules regarding travel and subsistence (T&S) expenses came into play on April 6th this year. Affecting anyone who works under the ‘supervision, direction or control’ (SDC) of an employment intermediary – that means pretty much all agency and umbrella company contractors – many of whom are likely to feel the pinch this tax year.

What’s happening and who is affected?

Included in the Finance Bill 2016, tax relief for travel and subsistence expenses has been reigned-in to stop contractors claiming for the journeys they regularly make to clients’ offices. If you’re self-employed, you’re more likely to be exempt. For those that aren’t, your opportunities for claiming tax relief on everyday expenses such as petrol, train fares, hotels and meal costs have been massively reduced.

If you’re a contractor who works through a limited company, any contracts that fall within IR35 (intermediaries tax legislation) will be affected.

You can no longer claim T&S tax relief if you work through:

  • An umbrella company
  • An agency / employment intermediary
  • A contract that falls within IR35

You can still claim T&S tax-relief for:

  • Non-IR35 contracts
  • Self-employed work gained independently
  • Work that isn’t subject to SDC (non agency)
  • One-off meetings, conferences, visits etc.

Why the change?

Previously, agency contractors could claim tax relief for any journey that wasn’t classed as ‘ordinary commuting.’ However, the nature of agency work means that daily journeys are rarely classed as ‘ordinary’ – ie. you’re often travelling to temporary workplaces for less than 24 months. This meant that contractors could claim tax relief on home-to-work journeys in the same way that permanent employees can for occasional meetings across the country.

This was seen as unfair – it’s not a system that permanent employees can take advantage of. So, in the 2015 Budget, George Osborne announced new legislation that only makes T&S tax relief available to self-employed workers who shoulder risk of working independently.

In effect, the new rules view a contractor’s home-to-work travel as ‘ordinary commuting’ and only allow tax relief for one-off meetings or irregular journeys, just the same as permanent employees.

For example:

You’re a Designer who lives in Brighton and contracts through an umbrella company. Your current six-month contract is in London, and you travel there each day by train – you can no longer claim tax relief on the cost of your train tickets. Every now and then, your contract requires you to visit York for meetings – you can still claim tax relief for these journeys.

What does this mean for you?

Agencies and umbrella companies could react in several different ways: they could absorb the higher costs of travel; charge clients more to compensate for the rise; or pay contractors less to absorb the costs. In reaction to this, we could potentially see a decrease in the use of employment intermediaries.

Contractors who continue to work through intermediaries may be less willing to travel longer distances for work, and end-clients may be faced with either a smaller pool of contractors or higher rates. As a result, self-employed contractors who are unaffected by the rules may potentially see a rise in contracting opportunities.

To find out more about how the changes affect you, or to check if your contracts fall within IR35, speak to our team on 01825 748308.