Hammond heaps on more anti-contractor measures

Philip Hammond seemed to wrong-foot the entire contracting industry in his first Autumn Statement (AS) today, November 23^rd 2016, by not stating “IR35” once, neither in his speech, nor in his full report.

But at AS 4.11, entitled ‘off-payroll working rules,’ the Treasury confirms that it will shift the responsibility and liability for IR35 in the public sector from PSCs to the ‘paying agents’, from April.

It means that an adviser to contractors was right to tell ContractorUK on the eve of the Autumn Statement that while new detail might be “scant,” the OTS-criticised proposal will still go ahead next year.

Serving too to vindicate an ex-tax inspector who in September foresaw the IR35 reforms getting the green light today, Autumn Statement 2016 says: “The government will reform the off-payroll working rules in the public sector from April 2017”.

It adds: “This reform will help to tackle the high levels of non-compliance with the current rules and means that those working in a similar way to employees in the public sector will pay the same taxes as employees.”

IR35 reform approved, 5% rule removed

Most experts on IR35 are unmoved. “So the 2017 rules are definitely going ahead and it is confirmed that the agency -- in most cases -- will be the responsible party,” says Seb Maley, director of status advisory Qdos.

“[More] interesting [is] that the 5% allowance will be removed. This allowance is supposed to be for the ‘general expense of running a business.’”

In line with his comments, the AS states that IR35’s 5% tax-free allowance will be off-limits to PSCs in the public sector because, the Treasury says, “workers no longer bear the administrative burden of deciding whether the rules apply.”

Maley believes the removal is unfair. “The worker will presumably still have the general expense of running a business, but the government seems to think that the entire 5% would be spent on determining their IR35 status.

“It gives the indication that the government expects people to 'shut up shop' if they are deemed inside IR35 and take up a PAYE position.”

But there is still a prospect that all PSC contractors caught by IR35 -- not just those serving the public sector -- could eventually be working under this presumption.

Tim Stovold, partner at chartered accountants Kingston Smith explained: “There is no indication [in AS 2016] that this [IR35 reform package] will be extended beyond the public sector, but this is inevitable in due course…[because] HMRC still struggles to police the many personal service companies in existence”.

A more immediate prospect is tax staff pursuing their own civil service counterparts over contractors’ tax liabilities, once the IR35 reforms take effect from April, says tax investigations firm WTT Consulting.

“In a meeting with HMRC”, reflected the firm’s Graham Webber, “[they] did indicate that if an audit finds that tax should have been deducted and was not, all parties would be liable for the shortfall.

“The prospect of HMRC chasing, for example, HM Treasury will be interesting. The expectation is that they will, instead, chase the individual contractor.”

Disguised remuneration avoidance targeted

Also seemingly aimed at contractors, and due to raise some £650million -- much more than the IR35 reforms, is a new attack on ‘disguised earnings’, outlined at 4.46 of AS 2016.

“This looks like an extension to the IR35 reform proposals,” Mr Webber said. “Whilst a consultation is promised, it would be in line with recent actions if this was just a ‘technical’ consultation.

“In other words it’s a discussion on how to implement the charge, rather than whether it should be introduced.”

Both the crackdown on disguised remuneration avoidance schemes by the self-employed, and the IR35 reforms, are enough for contractors to regard AS 2016 as a 'bad' mini-Budget.

Flat Rate VAT Scheme raided

But there is a further change that will affect the vast majority of contractors and, unlike the IR35 reforms and disguised remuneration crackdown, there has been no consultation.

“The government will introduce a new 16.5% rate [on the Flat Rate VAT Scheme] from 1st April 2017 for businesses with limited costs, such as many labour-only businesses,” the AS says.

“This will help level the playing field, while maintaining the accounting simplification for the small businesses that use the scheme as intended. Guidance which has the force of law, published today, will introduce anti-forestalling provisions.”

Kate Cottrell, a leading advisor to contractors said: “As well as the go ahead for the public sector with IR35 changes and the loss of the 5% [rule], there are adverse changes to the flat rate VAT scheme.

“It means that most contractors will have to pay VAT at 16.5% now, so it's more bad news for contractors.”

Qdos’ Mr Maley confirmed: “A big blow for contractors today is the tightening up of the Flat Rate Scheme (FRS). The rate will be increased to 16.5% for businesses with limited costs, which will include the vast majority of contractors. This will virtually remove the benefit of the FRS for contractors, which is used heavily throughout the industry.”

Contractor accounting advisory Orange Genie spelt out the change to the FRS in numbers. “An IT contractor earning £100,000 would have seen a flat rate saving of £3,800, under the new rules this will reduce to [just] £200,” said the advisory’s Graham Fisher.

“This change may result in some contractors, genuinely working ‘outside’ IR35, switching to the standard VAT rules despite the administrative burden.”

Incorporation next in the spotlight

Additional AS 2016 announcements with the potential to leave contractors worse-off include the introduction of the salary sacrifice clampdown, a promised consultation on business expenses and a promised consultation on incorporation.

“The chancellor expressed concern about the contribution of ‘incorporations’ to the tax gap,” said Kingston Smith's Tim Stovold.

“There was no real detail in the statement and there is a consultation to follow, but the benefits of operating through a limited company…may be in the spotlight here.”

Meanwhile, another concern Mr Hammond expressed -- the UK making “hundreds of tax changes twice a year” by having a Budget followed by an AS --  could actually hand contractors a reprieve, because he will put a stop to the bi-annual updates.

“Mr Speaker I am abolishing the Autumn Statement,” the chancellor told the House of Commons.  "Starting in autumn 2017, Britain will have an autumn Budget, announcing tax changes well in advance of the start of the tax year. From 2018 there will be a Spring Statement, responding to the forecast from the OBR, but no major fiscal event.”

Editor’s Note: Further reaction to Autumn Statement 2016 and expert analysis, including on the chancellor’s personal finance announcements, will be published on ContractorUK tomorrow morning.