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Potential clampdown on contractor expenses

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12th Jan 2015
Tax Writer Taxwriter Ltd
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Individuals who work through their own personal service companies (PSC) could lose the ability to claim a tax deduction for the cost of travelling to their clients’ premises. Rebecca Cave explains why the government is suggesting this fundamental shift in the tax rules.

Certain employment agencies and umbrella companies (UC) are abusing the rules for claiming tax relief on travel to temporary workplaces. In many cases the tax relief the individual worker achieves is cancelled out by the fee he has to pay the employment agency, so he is worse off than he would have been under a direct employment contact.

This is discussed in the consultation document Employment Intermediaries: Temporary workers – relief for travel and subsistence expenses, which was released on 16 December 2014.

The details of contracts will vary but in generally the UC employs the worker on overarching contract of employment, such that UC’s address is the permanent workplace for the worker, and each work placement is a temporary workplace. The worker can then claim, and be reimbursed, expenses for traveling to each work placement plus “per diem” subsistence costs. Part of the worker’s pay may be treated as reimbursed travel costs (using salary substitution), so PAYE and NI is not applied to that part, saving tax for the worker and the UC.

Broadly a temporary workplace is where the worker travels to in order to work for a period of no more than 24 months, and he is not expected to work there for more than 24 months. If the worker works at one place for his entire employment contract, that place can’t be a temporary workplace, even if the employment contract is for less than 24 months. There is also a 40% of working time rule, which is not relevant to this consultation.    

The government is undertaking a wider review of all the tax rules for travel and subsistence expenses, but that will take some years. In the meantime it wants to block the perceived abuse of the travel and subsistence rules and has suggested two alternative fixes:

  1. to specify that where an individual is supplied through a third party, including a PSC, the workplace of the end client would in all cases be a “permanent workplace”
  2. to stop treating overarching contracts of employment as giving rise to a series of temporary 'employments' under a permanent contract for tax purposes

The effect of option one for a contractor working through a PSC would be to disallow the cost of all travel from his “home-office” to his client’s premises, where the work on the contract is actually performed. Many contractors undertake contracts far from their  homes for extended periods, as they can be reimbursed for the cost of the travel and the associated subsistence (accommodation and food) while they are at the “temporary” location.

The government realises that this change would have a significant impact on skilled workers that operate through PSCs, and has asked for views from the contractor community and their advisers. It says that excluding PSCs from option one would encourage employment agencies to force workers to operate through PSCs.

The consultation is open until 10 February, and the government’s decision will be announced in the Budget in March. Any resulting changes to tax rules will not come into effect until 2016 at the earliest, and thus will be dependent on the outcome of the general election.

If you act for contractors working through PSCs you can make your views known by emailing HMRC on [email protected], or comment below.

Replies (33)

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Dave Chaplin
By Dave Chaplin
12th Jan 2015 11:46

Denying travel expenses to contractors is bonkers

As I mentioned in my recent blog, denying travel and subsistence tax relief to contractors is madness. Why does the Chancellor want to destroy the highly efficient tax gathering machines that are umbrella companies?

And including PSCs is even more bonkers, risking an impact on all small businesses, not just contractors. Why should large firms save more tax by retaining tax relief on legitimate expenses of their staff?

The measures proposed by the government will lead to chaos in one part of our economy that is flourishing. We can only hope that HMRC will drop the proposals.

Dave Chaplin

CEO, ContractorCalculator

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Replying to Wilson Philips:
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By Mobileaccountantaz
12th Jan 2015 15:29

Self Employed or Temp Contractor?

Here in the states there is a large difference.  When one works for a temp agency they are on payroll and have taxes paid for them.  As a truly self employed business person why should a temp worked get to claim expenses?  They shouldn't be able to take mileage for a job they are on. 

For me I take mileage going to and from my clients but I also pay my own taxes. 

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By lja20
12th Jan 2015 12:04

flag

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By Ian K
12th Jan 2015 12:11

Travel expenses juggernaut

HMRC are on a mission here as demonstrated by recent tax case successes re the medical profession.

The cynic would suggest they won't rest until they make every journey a commuting journey.......for everyone.......

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By Ian McTernan CTA
12th Jan 2015 12:12

Unnecessary

While Dave is somewhat biased (obviously), I have to agree with his reasoning.

The proposal to disallow travel costs from a PSC seems very harsh and could lead to a distortion in the market, as well as being a sledgehammer to crack a nut (as usual).

Looks more like an attempt to grab more tax than anything else.

If they are 'abusing the rules' then target the abusers, take a test case and establish what the Courts consider fair and reasonable.

Maybe ensure that all the UC are all registered and paying taxes in the UK would be a good start, then ensuring that the rate of pay is not reduced by the potential 'tax saving' of travel expenses being claimed.  Follow that up with ensuring that any 'per diem' expenses paid are actually used to cover expenses.

They should also look at the bigger picture- if contractors are spending more money on travel and accommodation, that yields taxes and employs people too.

There are much better ways of raising more taxes - how about bringing in an 'alternative minimum tax' rate on turnover generated in this country by overseas entities or bringing in rules to ensure VAT is collected on goods sold in to this country from abroad.

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Replying to johngroganjga:
Dave Chaplin
By Dave Chaplin
12th Jan 2015 13:03

Not biased, just being practical

Ian McTernan CTA wrote:

While Dave is somewhat biased (obviously), I have to agree with his reasoning.

I'm not biased. It makes no difference to our contracting portal how contractors operate. They will still end up operating somehow and service providers will want to market to them.

I just think HMRC are crazy to motivate tens of thousands of tax paying umbrella workers into other models, and then try to pick them off one-by-one. Trying to ring fence PSCs and say they are not affected is a non-starter, because there is no definition. Even if there was it would provide an unfair advantage to other non-PSC businesses. So if PSCs remain an option you'll then have thousands of contractors moving to use the PSC model, and not being caught by IR35 - enforcement is laughable. The MSC legislation won't kick in because firms won't be managing and facilitating - just offering online book keeping and accounting services.

An investment surcharge on dividends was around in the 70's (I think), when income tax was 83% (on about £180K+ in todays money). Given the number of consulting gigs career politicans have I can't see them voting for 10% tax on their additional income streams.

The behavourial effects of this proposed legislation are not good for Hector.

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By Vaughan Blake1
12th Jan 2015 12:29

Bored now!

We seem to be starting from the premise here that PSCs are not paying enough tax.

It seems to be part of the recurring theme that too much money is drawn out of small companies via dividends rather than Nicable salaries.

IR35, corporate partners, PSC travel expenses etc etc all arise from the same issue.

Why not simply levy an investment surcharge on close company dividends and be done with it?  Say 10% on all close company dividends over £2,500 per taxpayer per year.

Most of those involved will already be in self-assessment so it will not overburden the system.

I am sure there will be many complaints about it being unfair that 'contractors' don't get employment rights, holiday pay etc, etc and that the tax break in some way recompenses for this.  But, why should the tax system need to compensate these individuals, they should look to the main contractor for a premium rate, rather than to the tax system to compensate them and effectively subsidise the main contractor.

 

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By jake53256
12th Jan 2015 12:38

Cynical

Given the past experience of these government consultations it's probably advisable not to put in a response.  Past responses to other consultations seem to have had the effect of adding detail to the eventual legislation that captures every arrangement.  This has very little to do with the .gov's concern for exploited workers and everything to do with a perceived increase in tax take.

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By davidlawton
12th Jan 2015 12:43

Limited Company Expenses

Umbrella companies have been attempting to make such schemes more attractive to contractors, hence the over arching contracts.

This is against the spirit of the legislation regarding a temporary workplace. The limited company consultant takes commercial risk and it is therefore entirely appropriate that the 24 month rule regarding a temporary workplace has been in force to reflect the risk and nature of a consultants pattern of engagement.  

Hopefully HMRC will recognise this and provide a solution which safeguards the legitimacy of a limited company claim, whilst ending the practise of UC's using over arching contracts to circumvent the travel and subsistence rules.

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By Ian_mcdonald
12th Jan 2015 13:39

Long overdue.

I recently had 4 quotes for plumbing work and was dismayed to see all the one man band plumbers worked through limited companies - the ones I spoke to confirmed they were drawing dividends and a small amount of pay.

IMHO using PSC's has gone too far and the government needs to put disincentives in the way to level the playing field.

So I agree that they should not be allowed to deduct travel expenses.

I appreciate all these tradespersons need an accountant to setup and run their otherwise unnecessary limited company, so I am not expecting my thoughts to be well received!!

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By jeremyprocorporate
12th Jan 2015 13:56

What is the difference?

Two London based oil industry specialists are sent to Aberdeen to work alongside a business on a three month project. Both travel up by train and stay in the same hotel for the duration.

One specialist works for the business in question and has been sent from HQ. HQ book and pay both for the train and the hotel and the specialist has a company credit card to cover other outgoings.

The second specialist is employed by his own personal service company.

It looks as though the proposed change in the law aims to discriminated against the second specialist as, unlike the employee, he will be taxed on any reimbursement of his expenses - is this correct or am I missing something?

 

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By mfwiniberg
12th Jan 2015 14:03

IR35 mess continues

This seems to me to be yet another attempt to extract tax from easy targets by any means possible, rather than go after the more difficult (and yet probably much more lucrative) avoiders like Vodafone, Starbucks etc.

After all these years, and having ready the recent IR35 'guidance' on HMRC, it still isn't at all clear when IR35 might apply. Every single quoted 'case' or 'example' seems to be about a PSC providing a service to a single client.

What about companies like mine? For the last 40 years I have provided services to multiple clients simultaneously, mostly working from home, but occasionally on-site. I have no employment rights at those clients, I control my own time and location of work for the most part, my company pays my expenses for travel and accomodation etc when needed - sometimes recoverable from clients, sometime not, I have to provide my own materials and capital equipment etc. I contract in other workers to cover my clients if I'm not available, and my wife also provides services to clients through my company and charges her time out.

Yet HMRC obviously think that I'm creaming the system and doing them out of billions of pouinds of tax revenue. (I must be, because last year my total income came to almost £25,000 - think how many warships the tax on that could buy!).

I'm hopefully going to live long enough to retire (itself becoming an ever more distant prospect after having lost pension rights through Equitable Life, and then the SERPS in/out fiasco, not to mention the raising of the pension age), and yet the only thing HMRC can find to think about is the huge amount of tax I must be saving by operating a perfectly legitimate (and legal) business.

I'm more than happy to pay my fair share of tax, but this constant atmosphere of persecution simply because I'm trying to earn a living really is beginning to make me wish I'd emigrated. I'd feel slightly less aggrieved if HMRC themselves hadn't used exactly the same PSC/single client contract arrangements themselves to avoid paying NIC, SSP etc to their top 'consultants'!

AAAAAAAAAAAARRRRRRRRGGGGGGHHHHHHHHHHHHH!!!!

(Sorry, I'll get me coat...)

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Replying to GW:
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By Ken of Chester le Street
19th Jan 2015 11:27

reply to mfwiniberg

 .....HMRC themselves ......used exactly the same PSC/single client contract arrangements themselves to avoid paying NIC, SSP etc to their top 'consultants'! 

"Not many people know that!"

The people who benefit are the end contractors, for the reasons stated. As I recall from the days before I retired, it was the interposition of an agency that brought IR35 into play, because otherwise the subcontractor/ specialist would have lost his self-employed status under a section whose reference I now forget.  

I used to spend many happy hours vetting contracts for SE status, whether IR35 or specialists at academic institutions. A good agency would produce IR35-proof contracts, others wouldn't. Some universities were hopeless on tax implications, others had their own in-house tax wizards.    

 

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Replying to Matrix:
By cfield
19th Jan 2015 11:43

No such thing as an IR35 proof contract

ken of chesterle street wrote:

A good agency would produce IR35-proof contracts, 

There's no such thing as an "IR35 proof contract" and never was. The best you can do is "IR35 friendly"

And there doesn't have to be an agency for IR35 to be in point. However, using an agency did often mean losing self-employed status, although those serving the construction industry simply put them on CIS, something that is now outlawed under the "new agency rules" unless they can prove no SDC (supervision, direction or control).

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By Old Greying Accountant
12th Jan 2015 14:36

It still ...

... all comes back to unifying NI and tax, then most of the problem will dissolve.

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By rbw
12th Jan 2015 15:54

The difference is the poor old employees lose

jeremyprocorporate's example ignores the fact that the specialist who works for the business in question will get no relief for ordinary commuting while the second specialist employed by his own personal service company gets relief for travel to all the temporary places - even if "temporary" is nearly 2 years. So there's a clear incentive not to be an employee.

Of course it's impossible to level the playing field completely.  But I can think of few if any jurisdictions which make limited liability so easy and so beneficial so perhaps it'd be a relatively small quid pro quo.  

And in response to Ian McTernan, it could equally well be argued that tax relief for ordinary commuting would encourage greater use of public transport or cars, of hotels, of restaurants etc. all with some return to the Exchequer.   Some fiscs allow it.  But it doesn't make for efficient allocation of resources.  Does nothing for balance of trade (and if anything would displace tourism).  And would be b***** expensive for the Exchequer.

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By David Gordon FCCA
12th Jan 2015 16:17

Dear Ian McDonald

Dear Ian

 We live in different worlds. I turn all my small traders into Ltd Cos. The reasons do not have much to do with tax. Over a three or four year period the tax works out pretty much the same as s-e.

1)

It means that we know how much tax we have to pay before we pay it.

2)

By putting them on Minimum national rate for PAYE my clients are entitled to sick pay, maternity pay, and other benefits not available to s-e clients.

 Also, the ltd regime is much easier for them to understand, and where earnings are not guaranteed you do not get this see-saw effect of does he pay in advance this year and not next year.

The other reality is that HMRC seem to regard every s-e tradesman as a crook. They do not do this to Ltd Cos.

Why? I have begun to think it is often because the Ltd Co/C.Tax system fits nicely and tidily into their IT systems, unlike those annoying trades-persons.

 

 

 

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Replying to DJKL:
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By ver1tate
17th Jan 2015 23:14

Ltd Cos.

An FCCA in my area did exactly the same, even to a burger stall. It made a very slight difference to his clients' taxes, but they still ended up with less money than remaining as S/E. The only reason that they paid less tax was because of all the additional fees he was charging them which they would not have had under S/E. But he had a very lucrative practice.

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By Steven16
12th Jan 2015 18:10

IR35

With IR35 being difficult to enforce, it looks like they are looking for alternatives to stop people avoiding tax, however this approach seems like it would use a bigger net and catch contractors who are not within IR35 along the way.

They would need to be quite selective in who it applies to. Perhaps if you are travelling to the same end-client for 24 months or more (and it was your only client) then fine, disallow travel expenses, but if the contractor was doing that then he would probably fall into IR35 anyway, making the new rule pointless.

Makes no sense to do this to contractors who have multiple end clients though, because travel would be an obvious and genuine business expense, and would make it unfair by the point and argument that Jeremy made.

Just seems like a poor attempt/idea at IR35 enforcement to me.

There clearly are people abusing this and businesses hiring "contractors" to do work for them, but this isn't the way to go about catching them.

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By AndrewV12
13th Jan 2015 12:45

24 months and 40% tax rules

It appears the 24 month rule and 40 % rules mentioned above are being squeezed, Its on going but also tied into the Country being skint, whats next. 

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By Romanista
13th Jan 2015 17:31

Do away with the distinction

The driver is the different rules that apply for employed and self-employed individuals.  That and the reversal in the trend to tax dividends higher than earned income which necessitated rules to oblige limited companies to distribute reserves over a certain level.  Have a level playing field; combine tax and NIC and apply it to all income irrespective of whether it is earnings, self-employed profits or dividends.  Then standardise the travel rules for everyone. 

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By stratty
13th Jan 2015 17:43

Controversial Alternative

It would never happen but the alternative would be for the Government to provide tax relief on the cost of commuting to work.

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By ver1tate
13th Jan 2015 23:58

Umbrella Companies

A previously self employed contractor was persuaded to have an umbrella company act for him with the promise of more cash remaining for him at the end of each week. 

All that really happened is that he paid both employers and employees NI PLUS the companies fees, and ended up worse off.

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Chris M
By mr. mischief
14th Jan 2015 07:03

Surely it is easy?

I have 30 or so limited company contractors.  The majority of them work wholly or mainly at one site.  They have mostly had formal contract reviews by Qdos and the wording of their contracts is that they are outside IR35.  In practice, I am very confident that I would easily win an IR35 case because the way the contracts operate they are all treated differently - VERY differently - to staff people carrying out similar roles sitting in the same workplaces.

They all claim travelling costs in the first 24 months under the current rules.  The Government wants to restrict this which in my view is perfectly fair and reasonable in the context of a £90 billion deficit.

Here is my simple 2 stage process:

1.  Remove the number 24 from the "24 month" rule.

2.  Insert the number 6.

No hassles, no complex consultation processes, no getting the rest of us who travel to multiple clients all upset.  Lots of extra tax revenue.

How hard can this be HMRC?

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By thehaggis
14th Jan 2015 21:26

@Mischief

Before the 1998 FA changes introduced the new travel rules, the Inland Revenue concession was that a temporary place was no longer than 12 months.  FA 1998 made that 24 months.  This is a problem of their own making.

6 months might be a bit short for a temporary assignment.  I would propose that it reverted to 12 months, with the caveat that if it exceeded 12 months, none of the travel from day 1 would be allowed.

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By Graeme Lindsay Abdn
19th Jan 2015 11:59

Different view!

At my firm we do not normally allow limited company contractors to claim their travel expenses to the normal place at work.

This is based on the tax legislation, which requires where a place of work is capable of being treated as temporary, that is when the 40%/24 month rules are considered.  So if the place of work the consultants attend is the same from week to week, it is almost certain this is the permanent place of work, so one never considers the temporary 40%/24 month rules!

This point appears to have been supported in the Upper Tribunal case of Reed Employment plc & 11 Others v HMRC [2014]UKUT0160(TCC).  The case can be found at: http://www.tribunals.gov.uk/financeandtax/Documents/Reed_Employment_Plc_...

See page 76 and paragraphs 254 to 281 inclusive, although the reasoning in this Agency Staff case is a bit difficult to follow, it is clear the Judges found the staff had a permanent place of work.

Well, back to the tax returns!

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By Sheepy306
18th Jan 2015 17:04

Bigger picture

Is there a link between a burger stall and IR35?

Aside from that, the client would have received the usual Limited Liability benefits though, more flexibility with regards to profit extraction, cashflow advantages of not having to make SA payments on account, more options with regards to potential sale of business, can effectively walk away from the business should things turn bad etc. So in a marginal case like this then I would also probably have suggested incorporation, but given the client the pro's and con's to ultimately decide for themselves, although clients do often like decisions to be made for them So just saying that other factors need to be looked at too, not just the tax or income impact of a few pounds either way.

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By cfield
18th Jan 2015 16:47

Too soft on umbrellas

HMRC have already identified the problem - dodgy umbrella companies. In my opinion, they dish out dispensations like confetti to these firms but don't educate/monitor them enough.

I know dispensations will be going out of the window in a year or so, but they were a perfect way of identifying umbrellas. All they had to do was introduce a question asking if the majority of their employees work on-site for third parties. They could then have sent them Booklets 480/490 to read and not issued the dispensation until the directors had signed personally to confirm they had read and understood them. Maybe even make them pass a little test first. Early inspections could then have followed to make sure they were playing to the rules.

Obviously they lack the manpower now to police the system as thoroughly as they should, but if travel expenses are such a huge problem that they warrant a consultation followed by a change in the law, then they should have found the resources. All of these abuses could have been nipped in the bud before they became so endemic.

Instead of that, they get the sledgehammer out again and the result will be small firms being put at a disadvantage to large firms. 

 

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By Vaughan Blake1
19th Jan 2015 14:59

HMRC's veiw is..

That the contract is the last thing they look at!

I spent a whole afternoon that I will never get back,working through 103 questions from a checklist with an HMRC status officer. I had started the meeting waving the IR35 'proof' contract only to be told that he would look at that at the end of the meeting, f I feel it needs to be considered'.  95% of the afternoon was spent looking at the reality of the relationship rather than the contract itself!

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Replying to Matrix:
By cfield
19th Jan 2015 18:14

HMRC checklist

Vaughan Blake1 wrote:

I spent a whole afternoon that I will never get back,working through 103 questions from a checklist with an HMRC status officer. 

Was Mutuality of Obligations in there? That's the one they like to pretend doesn't exist (or always exists, depending on which way you look at it).

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By yogic accountant
30th Jan 2015 10:27

24 months is the problem

I would tend to agree with other posters here, reducing the temporary workplace time limit to say 6 months would seem to be a much simpler and fairer way of addressing this issue. IMHO 24months doesn't seem to be very temporary, not with working patterns these days.

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By Tickers
04th Feb 2015 11:52

Ireland

Something similar is currently happening in Ireland. Google "Revenue Contractors Project".

If you're interested it's worth researching as the tax regimes in Ireland and UK are very similar so it may set some precedents in terms of challenging HMRC findings on points of law etc,

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By loopssmith
21st Apr 2015 11:47

Contractors have your say

The changes due in April 2016  will restrict T&S claims for contractors, it will not only affect contractors working via umbrella companies but also those working through their own limited company. AUCAE are asking contractors to speak up on the impact this will have on them so that this can be presented to HMRC.
#contractorshaveyoursay at http://www.allumbrellacompaniesareequal.com/aucae-surveys.html

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