Budget 2010: Osborne dodges IR35

An "appropriate" rise to VAT, "pragmatic" changes to capital gains tax and a "welcome" fall in the take of private sector profits are all measures casting the new chancellor as a friend to enterprise.



Such are the consensus verdicts from business advisors on George's Osborne's first Budget, presented yesterday as an "unavoidable" mix of tax rises spending cuts, which will be felt for years to come.



Promising he would not "hide hard choices," but would instead deliver them directly "in this speech," Mr Osborne said that the rate of VAT would climb to 20% from January 4th 2011.



From this commencement date, rates under the VAT flat rate scheme will increase to reflect the headline rate notching up 2.5%, in a move estimated to net the government £13billion a year.



Delaying a higher VAT rate until into the new year of 2011 has pleased business advisors for affording their clients time to plan, so they can avoid a rerun of the chaos seen when the rate was cut immediately.



Taking a more direct stab at the-then Labour chancellor Alistair Darling, and perhaps even his predecessor Gordon Brown, Mr Osborne vowed not to "bury" the Budget's other tough choices in its "small print."



To claim he has kept his promise, which advisors welcomed, he could cite his announcing that capital gains tax for higher rate taxpayers is to rise to 28%, effective from midnight last night.



The tax rise, which is less painful than had been feared, was aimed away from companies, as the CGT "entrepreneurs relief" rate of 10% on the first £2m of gains will be extended to the first £5m.



To woo hard-nosed business-types still unconvinced by Mr Osborne, he announced that corporation tax will fall by 1% annually until it reaches 24%, and that small company tax will be cut by 2% to 20%.



Applause for the lower tax rates came from all the major business groups, high-profile entrepreneurs, economists and leading accountants, for benefiting both UK 'plc' and UK 'Ltd'.



Similarly, the chancellor did the "best of a bad job" with his changes to CGT, and 'made the right choice' to put off the higher VAT rate until a few days into next year, said the Chartered Institute of Taxation.



Yet the state's offering to enterprise is not entirely new - relief from CGT on business assets and the easing of company tax rates are both measures which the former government introduced in their outgoing budget statements.



Mr Osborne's bid to distance himself from past chancellors, with his 'no devil in the detail' pledge, is further frustrated by him being too stretched by the recession to tackle contractor taxes, such as IR35, as Mr Darling was in his outgoing Budget.



"Despite their pledge to review and replace it with simpler measures, IR35 was left untouched by this coalition government yesterday because of two reasons," says Martin Hesketh, managing director of Brookson, a contractor accountant.



"Firstly, I think the government probably realises that its ministers need to improve their understanding of the flexible and freelance workforce before they can effectively address IR35.



"Secondly, chancellor Osborne is understandably preoccupied with the UK's macro economic position, exactly like his predecessor was, so IR35 was always going to be low priority in this emergency Budget."



According to the Big Red Book, the Tory-Lib Dem government "remains committed to a review of IR35 and small business tax," and plans to "release further details shortly."



Brookson reflected: "Alongside work through Managed Service Companies and perhaps umbrella companies, IR35 will be addressed at some point in the future; it might be this year, but it might not be."



However another Budget announcement to boost enterprise - a regional holiday from national insurance payments for employers taking on the first 10 workers - implies no end to IR35 until at least September.



"Contractors will welcome the cut in the small companies' corporation tax rate, and the proposals for small business tax reform," explained Simon Dolan, of SJD Accountancy.



"IR35, in its current form at least, will probably be abolished during this reform, but it will take some time...the fact that IR35 is mentioned in the notice on the NIC holiday means that IR35 won't be repealed before the scheme is due to start, on September 6th of this year."



According to the relevant Budget notice, while most workers will be within the scope of the scheme, there will be specific exclusions, such as for those "employees operating under companies caught by the IR35 rules (the deemed payment rules)."



Roger Sinclair, legal consultant at Egos, reflected: "The inference [here] is simply the obvious one - that IR35...[is] here, and will remain here, until and unless it is expressly removed."



The first £5,000 of Class 1 employer NICs due in the first 12 months of employment will, likewise, not be waivered for employers if the hired worker operates through a "Managed Service Company," the government said.



"This document [states] that those workers who are caught by IR35 and those engaged by MSC's will be specifically excluded from benefitting from the new scheme," said IR35 advisory Bauer & Cottrell.



"The implication is that IR35 in some form is a very important anti-avoidance tool and it seems that this new scheme to lower the NIC burden would not be workable without it."



For firm co-founder, Kate Cottrell, the government's mention of IR35 in relation to the incoming NIC holiday is an example of how IR35 "underpin lots of other" regulations, including those governing MSCs.



The task of trying to unravel IR35 will fall to the Office of Tax Simplification, but it may receive extra scrutiny, as the Budget says each central department will review the employment laws which they introduced.



These reviews, partly aimed at ensuring "maximum flexibility" in the labour market, could result in changes to employment law as part of a 'one-in one-out approach' to regulatory reform.



Phil Orford, chief executive of the Forum of Private Business said: "The pledge for a wholesale review of employment law – quietly announced in the full Budget document – is a highly welcome one.



"Our members frequently cite employment law as one of their main areas of concern so any moves to simplify and rebalance the regulations affecting smaller employers have got to be welcomed."



One such small employer serving the contracting sector, Parasol, an umbrella company, was upbeat about other announcements in the Budget relating to tax and NIC rates.



Chief executive Rob Crossland explained: "The increase [of £1000 to £7,475]] to the income tax threshold, coupled with a £21 per week increase in employers National Insurance contributions, which we pass on to our contractors, will see them with more take home pay in their pockets."



But not unlike previous Budget statements, the small print of the emergency Budget 2010 reveals that what the chancellor gives with one hand to contractors, he takes away with his other.



With effect from January 2011, the standard rate of Insurance Premium Tax will creep up to 6%, imposing extra cost on contractors taking cover against tax investigations, or buying professional indemnity/liability insurance.



"We do not think that the average increase of £3.00 will dissuade contractors from buying", said a spokesman for Caunce O' Hara, a PII provider. "Indeed agencies will still make it a contractual condition in many instances."



Such coverage, which can protect freelancers in a legal showdown over contract deliverables, will continue to receive interest from contractors in the public sector, where spending is due to be cut by £83bn from 2014.



These cutbacks, expected to reduce the UK's budget deficit by 77%, will slash about 25% from all department budgets – excluding those for health and international aid.



Precisely which contracts will go is to remain under wraps until the state's spending review in October, yet workers in the sector earning over £21,000 already know that their pay will certainly be frozen for two years.



Derek Kelly, of ClearSkyAccounting said: "There are concerns that cuts to public sector funding will have a negative impact on employment in general and, specifically for contractors, the number of projects available.



"However it could also be considered a positive. If this leads to a freeze on recruitment in the public sector in the hope that the private sector enjoys enough growth to compensate, then there could actually be an increase in public sector contractors as temporary workers are brought in to complete critical projects."



Asked about the likely impact, one IT recruiter said the wage freeze would help address the "imbalance where the private sector has been subject to much more stringent spending restrictions" over the last two years.



Alan Rommel, of Parity Resources, added that the announced cutbacks, implied job losses, and pay freeze facing millions of government staff were unlikely to faze agile contractors with transferable skills.



"Employment and salary levels have continued to rise at much higher levels than in the private sector," he said.



"But one of the benefits of the flexibility in contracting is the ability to follow the money and if more money becomes available in the private sector than in the public, expect there to be a migration towards the private sector."



Video games development houses are likely to be worse off, however, as the Budget announces that Labour's proposal of a tax relief scheme for the industry has been dropped.



Although Mr Osborne made other outright cancellations - (the 50p a month 'landline tax' to fund superfast broadband) and stoppages - (£11bn of benefits) his axing of relief for games-makers is one of the few direct blows which he dealt to British firms.



"The Budget is on the whole to be welcomed," said Mr Dolan of SJD. "We have been given sensible ideas which would appear to promote business and businesses".



Mr Kelly, of ClearSky, agreed: "The new government has taken a stance that slightly favours the small business and encourages enterprise, as they clearly see this as the best way to solve the UK's economic problems."



And despite the previous two chancellors being notorious for merely making the right noises to enterprise, Brookson believes the language used in Mr Osborne's Budget statement and full report is more specific to business needs, while being consistent with the government's position.



"We've come to expect warm words to the business community from chancellors of the exchequer, though this time they were backed up with welcome proposals and tangible policies," argued Hesketh.



"I feel cautiously optimistic that the UK government is improving its offering to enterprise, particularly new employers, start-ups and one-person companies, as a matter of some urgency."