Autumn Statement 2016: Contractors' Guide
IR35 shift; No surprise there then
The most major change to contracting in yesterday’s Autumn Statement 2016 was also it’s least shocking -- public sector IR35 reform. “No surprise” at all, says tax firm Orange Genie.
Nevertheless, IPSE is taking legal advice about whether it can challenge taxing contractors as staff without granting employment rights -- an upshot of the reform -- on the grounds it is unfair.
“If you work or plan to work in the public sector, let us know the action you’ll be taking,” the body said. “We’ll continue to gather evidence and push for government to change its mind.”
And as the payer must interpret both IR35 and if PSCs are caught by it, the interpretation PSCs expect of the payer may dictate if the PSC accepts work from them in the first place.
Affected PSCs are now asking what happens if they disagree with the IR35 opinion; if they can submit an alternative opinion and, if it differs, how to appeal and reclaim overpaid tax.
For now, PSC contractors on-contract with public sector end-clients should “obtain an up-to-date IR35 opinion to enable them to consider their options post-April”, Brookson added.
Status firm The Law Place explains why a second opinion is vital: “It’s just not reasonable to expect public bodies to be employment status experts and provide…an impartial service”.
It added: “Shifting the burden of assessing the application of…[IR35] to the body responsible for paying contractors is likely to be problematic, [but] result in much greater tax receipts”.
IR35 reform; The sting in the tail
“It’s a bit harsh, isn’t it? Public sector PSC workers even lose the 5% allowance because the burden of deciding whether IR35 applies has been taken away.”
Ex-tax official Carolyn Walsh was responding last night to AS 2016 answering a question that HMRC posed in the IR35 reform consultation -- keep the 5% expenses rule, or scrap it?
“We are outraged that the 5% tax-free allowance for business expenses will be removed from off-payroll workers in the public sector,” says the FCSA, sounding in agreement with Walsh.
The body added: “The new complexities around IR35 status means that professional contractors and interims will be forced into making deemed payments throughout the year.
“[This] in turn means that they will need more accountancy support going forwards to reconcile their financial affairs, and therefore more justification for the 5% allowance.”
Martyn Valentine, an employment lawyer confirmed: “It is probable that from April 2017, the 5% administrative allowance will be replaced by yet more expense for contractors.
“[This extra cost will arise because contractors] will be seeking second, unbiased opinions… [on their IR35 status], rather than relying solely on in-house public sector [opinions].”
In monetary terms, the impact of removing the rule is not insignificant. In fact, once the new VAT FRS rate is applied (see section below), IT contractors will be an average of £1,500 worse off a year.
Orange Genie last night said it arrived at this figure based on £100,000 in earnings for a PSC which if inside IR35 would, with the 5% rule, receive a take-home of £4,900 a month.
“But the same contractor without the 5% allowance will take home approximately £4,775 a month,” calculated Orange Genie’s chief executive Graham Fisher. “[So] a loss of £125 per month.”
Fisher, who says the chancellor’s axing of the allowance just ‘adds insult to injury’ for those PSCs who already face the payroll, isn’t alone in toting up the cost of the rule’s removal.
Exclusively for ContractorUK today, a detailed case study by Intouch Accounting shows that for one IR35-caught contractor, ‘Connie,’ the removal incurs extra tax of £1,962.
The Freelancer and Contractor Services Association (FCSA) reflected: “Once again, the hardworking…contractors who are propping up the UK economy are being penalised.”
Raid on the ‘FRS’; (Forget Real Simplicity)
It is forecast to impose higher VAT bills on the bulk of IT sector PSCs, but SJD Accountancy says a “handy” calculation tool on December 5th can be run to give a more definitive answer.
Another contractor accountancy firm is similarly cautious, saying it expects only “some” PSC workers to be caught by the “limited costs” criteria which is yet to be set for April 2017.
However, at this stage, caught-PSCs are those which incur costs on “goods” of less than 2% of VAT inclusive turnover, or of less than £1,000 a year, adds Brookson.
The firm’s Martin Hesketh is “disappointed” at the new rate (due to raise £195m in 2017/18); the FCSA’s Julia Kermode agrees it is “unfair” while the ATT, a tax body, is completely stumped.
“We are mystified as to what mischief this is intended to correct,” said Michael Steed of the Association of Taxation Technicians (ATT), even after reading a HMRC technical note.
“The introduction of a definition of what constitutes a ‘limited cost’ trader will inevitably complicate the FRS” which has for a long time simplified VAT rules, he said.
According to HMRC, a short period of consultation will run before the legislation is finalised on December 5th, indicating that the final legislation may not be published until March 2017.
As to its cause, in certain sectors there has been abuse where a PSC gets used solely for the purpose of accessing the FRS benefit for a worker who is caught by IR35, said Mr Hesketh.
Waiting in the wings (with malice)
On top of the already trailed phasing out of most salary-sacrifices from April, not too far away but not immediately -- are measures -- or the prospect of measures, against:
- Employee Business Expenses (consultation promised)
- Valuation of Benefits in Kind (consultation promised)
- Incorporation (consultation promised)
- Disguised Remuneration Scheme Users who are Self-Employed (action taken)
Most advisers believe that the expenses consultation is not aimed at contractors, but it is similar to the BiK consultation, in that it stems from a single concern the government has.
Specifically, and in light of “different forms of taxation of remuneration” the tax system must be “made fairer between workers carrying out the same work under different arrangements.”
This striving on the government’s part for a ‘one-size-fits-all’ approach, which was warned against on the eve of the AS 2016, is behind another clampdown -- on salary-sacrifice users.
Many such arrangements received short shrift in September, but scrutiny of the tax treatment of employee business expenses, notably those “not reimbursed by their employer” is new.
“It is expected this will limit flexibility on structuring salary packages which have a tax-free expense element to them under the only recently introduced ‘bespoke scale rate’ system.
“So, more employees will find that they need to claim relief for expenses via their own personal tax return rather than through the PAYE system,” explains tax firm Kingston Smith.
And this risks introducing “unnecessary complexity”, said the firm’s Tim Stovold, so he says whether the proposed changes actually take place following consultation remains to be seen.
Less detail is known about the BiK consultation, which will focus on employer-provided accommodation from a tax value perspective, plus other benefits, at Budget 2017.
Similarly lacking in specification is a future consultation on the tax impacts of incorporation -- a process that is “rapidly eroding revenues”, Mr Hammond claimed in his speech.
The Treasury made the claim too, saying more business incorporations will contribute a solid £3billion to a hefty £23bn drop in tax and NIC receipts, according to an OBR forecast for 2020-21.
Little wonder, then, that the chancellor yesterday ordered a £630million injection by extending disguised remuneration rules to the self-employed, and a £1.4bn raid on salary-sacrifices.
The latter is predicted not to affect swathes of the contract workforce, but knock-on effects from the arrangements being pared back could be visible at contractors’ workplaces.
“The changes suggested will create an imbalance between existing workers and new recruits,” says Mr Stovold, who reminded that tax-exempt mobile users face losing the perk.
“New recruits may be able to negotiate the package they want without a salary sacrifice, so start with a lower contractual salary and benefits package.
“[However], existing workers will be prevented from changing the way in which they are paid without falling into this new anti-avoidance regime.”
A chartered tax body is concerned too. “[The phasing out of salary sacrifice] will cause significant practical difficulties for employers, and could result in unfairness for employees.
“The same BIK is provided to two employees working alongside each other but, because of how each negotiated their remuneration package, they are taxed differently on their BIKs.
“In other words,” continues Colin Ben-Nathan of the Chartered Institute of Taxation, “we will end up with precisely the uneven playing field that the government is concerned about.”
AS One-liners / Miscellaneous
- Make disguised remuneration avoidance schemes less appealing to employers
- Raise over £450m by 2021-22 by increasing anti-avoidance measures and by litigating
- Consider the differing tax treatment of people doing the same work
- Spend £23bn on innovation over the next five years
- Review R&D tax credits and provide an extra £2bn a year in R& D funding
- Invest over £1bn by 2021 in fibre connections and 5G
- Provide £500,000 a year for FinTech specialists and appoint FinTech envoys
- Allocate an extra £450m to trial digital signalling technology on trains
- Keep corporation tax (corp tax) roadmap as it is, so it falls to a low of 17% in 2020
- Look to bring non-resident firms with taxable income from UK into corp. tax system
- Spend £1.1bn on English transport networks, and £220m on strategic roads
- Invest £390m in low emission and driverless car technology
- Inject £400m in venture capital funds to help tech firms unlock £1bn of new finance
- Fund initiative to boost management skills across businesses
- Give London greater control over delivery of employment support services
- Publish strategy for addressing productivity barriers in Northern Power House
- Pour in hundreds of millions to Local Enterprise Partnerships
- Consolidate Oxford and Cambridge as a transformation tech corridor
- Abandon future Autumn Statements, making the Budget the year’s only fiscal event
And finally, AS Few-liners: “from the experts”
“Whilst the micro situation for contractors has worsened slightly, the macro outlook is far improved [for them] -- there are lots of investments in projects that should create opportunities for contractors.”
James Poyser, managing director, inniAccounts.
“There was no recognition for the immense contribution the self-employed make to the economy. Having trumpeted the lowest unemployment rate for 11 years, ironically the chancellor has launched an attack on the group largely responsible for this record.”
Chris Bryce, chief executive, IPSE.
"Unfortunately, there is not much in the way of positive announcements to support the flexible workforce. Further changes may be around the corner… whilst there appears to be little ability to influence HMRC”.
Martin Hesketh, managing director, Brookson.