Autumn Statement 2014 – a guide for contractors

Umbrella companies and contractors who use them are the temporary labour market figures most in the sights of George Osborne’s 2014 Autumn Statement (AS), as reported by ContractorUK yesterday and this morning.

The relevant chapter from the AS is immediately below. What follows are the other main areas of AS 2014 potentially impacting contractors.

These sections exclude the AS's implications for public sector contractors/suppliers. The implications of AS 2014 for contractors' personal finances are covered separately on ContractorUK by a leading IFA to contractors.

AS 2014: Umbrella Companies & Employment Intermediaries

  • The government will stop tax relief from being claimed on reimbursed business expenses when they are paid in conjunction with a salary-sacrifice scheme. (AS, 1.251)
  • The government will consult on the use of umbrella companies to deprive people of basic employment rights like the minimum wage and avoid tax. (AS speech)
  • A review into the increasing use of overarching contracts of employment by employment intermediaries such as umbrella companies will be held. (AS 2.147)
  • The government will publish a discussion paper shortly to inform possible action at Budget 2015. (AS, 2.147)
  • A minor amendment to correct legislation underpinning the penalty regime for the late filing or non-submission of quarterly returns from employment intermediaries will be made. This will be effective from April 6th 2015. (AS, 2.148)

The other main areas of Autumn Statement 2014 potentially impacting contractors are:

AS 2014: Tax Avoidance by New ‘Ltd’ Companies – ‘Restricting Unfair Tax Gain on Incorporating’

  • The government will restrict the Corporation Tax relief a company may obtain for the acquisition of the reputation and customer relationships associated with a business (‘goodwill’) when the business is acquired from a “related individual or partnership.” (AS, 2.146)

Reflecting on the move, which will affect acquisitions on or after December 3rd 2014, the ACCA’s Jason Piper told CUK: “It may not be so relevant for limited company IT contractors, as most already have to incorporate before they can start building any ‘goodwill.’

“But it will put a stop to ongoing difficulties around valuations for those entrepreneurs who have built a successful business without having to incorporate – yet at the cost of losing the relief. “

Accounting software provider FreeAgent explains that at the moment, when a sole trader incorporates, the resulting limited company can buy the goodwill in the existing business.

“Not only can this prove a very tax-efficient way to take money out of the company, the company can often claim tax relief on the amortisation of the goodwill” the provider said. 

But under AS 2014, there will immediately be a restriction of corporation tax relief on acquisition from a related individual or partnership.

“No further detail was given,” reflected FreeAgent’s Emily Coltman, “but I would expect this to mean that the amortisation of the goodwill will no longer be allowable for corporation tax.”

Tax charity the ATT disapproves of the new restriction. “[With] immediate effect,” it said, “[if an] individual sells their goodwill to their company, they will not get the benefit of Entrepreneurs' Relief (ER).

“That will mean that the individual’s gain on the sale of the goodwill will be subject to CGT at the normal CGT rates of either 18% or 28%. Under a parallel measure, the limited company will not be entitled to Corporation Tax relief on the gradual writing off of the purchase price of the goodwill.”

ATT’s president Natalie Miller thinks that HM Revenue & Customs should have consulted on the measures before introducing them with immediate effect, as it has done.

But she reminded that the denial of ER on the targeted sales of goodwill will not prevent individuals transferring goodwill on a tax-free basis upon incorporation. Indeed, there are two other reliefs that enable a transfer to be made without a tax charge but they have different tax consequences.

The ATT added: “We think that one side-effect of the new measure may be that more businesses are created as limited companies from the outset or transferred into limited companies at an earlier stage.

“That rather runs against the principle supported by the Office for Tax Simplification (OTS) that businesses should be structured according to their commercial needs rather than any particular tax treatment.”

Principle appears to be missing altogether, suggests Keith Gordon, the respected tax barrister. Of the Revenue’s move, he wrote: “What [the] chancellor didn't say: Entrepreneurs' Relief stopped on goodwill transfers to associated companies. HMRC change law to win war.”

AS 2014: Employee Expenses, Tax Simplifications & OTS work 

  • The government will continue to take forward the OTS Review of the rules for tax relief on employee benefits and expenses, towards a full public consultation on the framework for new rules. (AS, 2.141)
  • Also thanks to the OTS, limited companies and other employers will no longer have to report on form P11D any ‘trivial benefits’ – those worth under £50, from April 2015. (AS, 2.136)

At present, if an employer feels a benefit is trivial, they must request HMRC to agree to exempt it from disclosing it. The incoming £50 threshold, which will be a statutory exemption, should reduce the time and money that firms have to spend on managing their tax obligations.

That same positive outcome is behind the government’s decision to accept 51 of the 58 recommendations that the OTS tabled in its report into the competitiveness of the UK tax administration.

The Chartered Institute of Taxation (CIOT) welcomed the government’s acceptance: “We understand that the government has already started work on many of the recommendations and we look forward to seeing the details in due course.”

It added: “We particularly hope the government will continue to align the PAYE and NICs rules so that all earnings are subject to PAYE and NIC identically. This would help employers to understand their obligations by removing the need to consult and understand two separate codes. Also, we would suggest a permanent relaxation to the ‘on or before’ reporting obligation under Real Time Reporting to reduce the administrative burden, particularly on small businesses.”

AS 2014: Avoidance Measures on Businesses & Individuals

  • The so-called ‘Google Tax,’ formally known as the ‘Diverted Profits Tax’ will go ahead. It is designed to counter the use of “aggressive tax planning techniques used by multinational enterprise to divert profits from the UK.” It will be applicable at a rate of 25%, from April 1st 2015. (AS, 2.142)
  • The government will introduce legislation to give the UK the power to implement the OECD model for country-by-country reporting. As proposed by the tax campaigner Richard Murphy, the reporting model is based on the provision of high level information (profit allocation, taxes paid and economic activity per country) by multinationals to HMRC. (AS, 2.143)
  • The government will introduce legislation to strengthen the Disclosure of Tax Avoidance Scheme (DOTAS) regime, partly in light of the link now in place between Accelerated Payment Notices (APNs) and DOTAS. (AS, 2.161)

Cautiously welcoming the move (which extends to a new DOTAS taskforce being set up), the CIOT said: “There is clearly now a risk that advisers will try to avoid the APN regime by circumventing the DOTAS rules and thereby mislead potential scheme users.”

But the institute cautioned: “We are particularly concerned with the changes being proposed to the ‘hallmarks’ and ‘grandfathering’ provisions, which mean that schemes that had previously been excluded from DOTAS will now be included.

“We think that it is essential that the system should contain sufficient protection for the vast majority of advisers who comply with the rules, and that it should not be cast too widely so as to catch straightforward tax planning arrangements.”

  • The government will consult on action to take against ‘serial’ avoiders (AS, 2.158), potentially including publishing the names of people who have engaged in multiple avoidance schemes, and on whether and how to introduce penalties where the GAAR applies (AS, 2.159).
  • The civil penalties for offshore tax evasion will be enhanced by the government (AS, 2,155), as will the taxes which the regime covers. But the government says that, having now completed its review into the tax charge on loans from close companies to individuals, trusts and partnerships, it does not intend to make any changes to the structure of the tax charge.(AS, 2.154)
  • The government will consult on a proposal to give HMRC a new power so it can achieve early resolution and closure of one or more aspects of a tax enquiry, while “leaving the other aspects open.” (AS, 2.169)

AS 2014: Sole traders, Freelancing & the Self-Employed 

  • The government used AS 2014 to announce a tightening in the eligibility conditions of people who claim tax credits on the basis of self-employment (AS, 1.232).

Designed to prevent abuse of the system, the tightening includes a new test to ensure that work being undertaken is “genuine and effective.”

There will also be a requirement that anyone claiming working tax credit as self-employed registers with HMRC and provides their Unique Tax Reference.

“This will prevent bogus self-employment and abuse of the tax credits system, while allowing HMRC to continue to support those who are genuinely self-employed,” said the Treasury.

But to really help the self-employed, proposals to allow such independent workers to pay their tax bills more flexibly should have been accepted, says the Low Incomes Tax Reform Group.

The group, which drew up the proposals, explains that from April 2015, Class 2 National Insurance liabilities, often paid by the self-employed monthly, will have to be paid along with their tax liability in January. But LITRG says bunching tax payments into such a “lump sum” can cause problems for taxpayers.

“Besides, under Universal Credit, self-employed claimants whose earnings are low in January and July might become subject to the Minimum Income Floor and have their credit restricted, simply because of the way the tax liability falls,” the group said. “As a result, the claimant will receive less Universal Credit than they would have done had the tax bill been paid in smaller amounts.”

Anthony Thomas, LITRG’s chairman reflected: “Although at the moment taxpayers can make arrangements with HMRC to spread their payments, this requires them to pay their liabilities in equal instalments. This can be very difficult for the self-employed to do because often they receive large payments from customers, followed by weeks or months of little income.”

As there was no mention of the group’s proposals in AS 2014, Mr Thomas regards it as “very disappointing” that they seem to have been dismissed.  He regretted: “It might [have even] enabled more taxpayers to comply with their tax payment obligations, benefitting both them and the Exchequer.”

  • What will benefit freelancers, the self-employed and others who run their own business is the freeze on fuel duty (AS, 1.33), according to IPSE, the Association for Independent Professionals and the Self-Employed. 

The association also welcomed the “pro-business” approach of the chancellor, whose offerings to enterprise included a plan to restructure business rates (albeit by Budget 2016), a new cap on existing rates and an NI exemption for some firms taking on some apprentices.

However IPSE’s Andy Chamberlain said it was “disappointing” that improving the UK’s digital infrastructure, such as addressing the problem of poor broadband in rural areas, failed to significantly feature in the AS.

  • The only focus on broadband was small and confined to the North of the UK (AS, 1.194).

In fact, any new measures to support the growing number of people working for themselves are hard to come by in the Treasury document. Richard Murray of ClearSky Contractor Accounting confirmed: “This was a relatively quiet Autumn Statement for sole traders and self-employed professionals in terms of tax-related announcements”. But for already having enough obligations to HMRC to contend with, the accountant said the omission was likely “something I’m sure the vast majority of freelancers will welcome.”

AS 2014: SMEs, Organisations & Industry-Specific Announcements

  • The government will increase the rate of the of the ‘above the line’ R&D tax credit from 10% to 11% and will increase the rate of the SME scheme from 225% to 230%, from 1 April 2015 (AS, 2.97)
  • The government will restrict qualifying expenditure for R&D tax credits so that the costs of materials incorporated in products that are sold are not eligible, with effect from 1 April 2015. (AS, 2.98)
  • The government will introduce an advanced assurance scheme for small businesses making their first claim and develop new guidance for R&D tax credits. The government will launch a consultation on the issues faced by smaller businesses when claiming R&D tax credits in January 2015. (AS, 2.99).
  • Invest £113m to build a new Cognitive Computing Research Centre, aimed at giving non-computer specialists insights from big data in order to enhance and design products, services and manufacturing processes.(AS, 2.20)
  • Invest £235m to build a new Sir Henry Royce Institute for advanced materials, research and innovation. (AS, 2.20)
  • Build a new £20m hub for Ageing Science, and launch £750,000 development funding for the new National College for Onshore Oil and Gas (AS, 2.20)
  • The government will extend Funding for Lending to 2016, with a £500m pot to be focussed on small firms. Meanwhile, £400m will go towards Enterprise Capital Funds which invest in fast growth firms (AS, 1.138)
  • The government will offer a £45m support package for SMEs seeking to become first-time exporters outside the EU. A modernising and digitalising of UK Export Finance’s processes will also take place to make them more SME-accessible.(AS, 1.178-1.180)

Business lobbyist The Institute of Directors reflected: “The shift to put more resources into digitising export support is crucial.

“Nearly half of IoD members have used social media and online networking to identify business opportunities abroad, indicating that digital resources are important tools for would-be exporters.

“But there is no substitute for tax relief when it comes to offsetting costs to get businesses exporting, and the IoD hopes this will be an important consideration for this and the next government.”

  • Launch a £95m investment into European Space Agency programmes, so the UK can “take the operational lead” on the first European Rover mission to Mars which will search for life, past and present.

“The chancellor spoke of a ‘Golden Age’ when it came to technology, and his announcements should help to ensure this age continues,” said the IoD’s head of technology policy Jimmy McLoughlin.

He added: “Britain has long been a leader in the space sector, and funding the first European rover mission will pay for itself far into the future when the information and technology acquired makes regular missions to Mars possible.“

Thursday 4th December 2014