'Tax nightmare' if government alters expenses rules

Date: 1st August 2008

Tax experts have suggested that government plans to alter the way self-employed contractors can claim travel expenses could backfire in the form of reduced revenue.

ContractorCalculator chief executive Dave Chaplin explained that the latest HM Treasury plans include a scheme that would mean that building contractors working for umbrella companies as employees would lose their right to claim back travel expenses.

Mr Chaplin said that the move might end up forcing many builders to leave umbrella companies and set up their own limited companies. If they did this, the government would lose significant sums of PAYE income tax, National Insurance contributions and VAT.

"Contractors working through umbrella companies and claiming expenses typically pay 37 per cent of their income in tax," he explained.

"Yet contractors outside of IR35 who operate via limited companies pay approximately 25 per cent of their income in tax. Which would the Exchequer rather have?"

Me Chaplin added that the move might also put several umbrella companies out of business, which would end up creating more work for the government.

"Right now, the umbrella companies will send a single invoice to an agency on behalf of thousands of contractors.

"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," he concluded.