Budget 2014: How contractors are affected
Budget 2014: tax scheme contractors hit
That’s because any taxpayer in receipt of a HMRC enquiry notice or notice of assessment, or who has used a tax avoidance scheme that is registered, or countered by the GAAR, will be forced to pay the disputed tax up front. In all cases, the taxpayer will have no right of appeal.
HMRC’s analysis of the individuals affected – at least 16,000 are contractors – shows that each has a mean gross income of £262,000 and the vast majority (85%), have multiple sources of income, including from self-employment.
But chartered accountancy firm Kingston Smith believes that some of these individuals -- who used legal tax avoidance mechanisms, and followed HMRC guidance by notifying the department that they used them – could now be facing financial ruin.
The firm said: “Allowing HMRC to demand the disputed tax to be paid upfront…may force a number of people who participated in these arrangements in good faith into bankruptcy, [partly because] the disclosure of tax avoidance schemes (DOTAS) has been in operation for several years.”
Paul Spindler, a partner at the firm, warned that one consequence of this new power for HMRC might be to encourage some individuals to “gamble and use structures not disclosed under the DOTAS legislation.”
He also told ContractorUK: “The proposed measures announced in the Budget are due to come into effect from the date of Royal Assent, and they will relate to anyone who has an open appeal or enquiry.
“And where HMRC disputes the amount of tax due, they can demand payment before the case is resolved. [So] legal challenges may well arise, as this is tantamount to being judged guilty and having to prove your innocence, contrary to the spirit of natural justice.”
Similar wording -- and disapproval -- came from Stephen Coleclough, president of the Chartered Institute of Taxation.
“Allowing HMRC to act as prosecutor, judge and jury based on the DOTAS regime, which was not meant to be used for these purposes, is going too far,” he said yesterday.
“The fact that there has been disclosure under DOTAS indicates an intention to be open and transparent with HMRC. It is unreasonable to now introduce a retrospective change of law leading to an accelerated payment of tax.”
Even stronger condemnation came last night from contractor accountancy firm DNS Associates. Its managing director Sumit Agarwal said: “The draconian approach of the UK government is going to put many taxpayers under a huge burden; increasing the powers of HMRC worries me a lot and should worry us all.”
Trying to put into context how the Revenue’s new power will impact the contract workforce, Simon Dolan, founder of SJD Accountancy – voted Best Accountant of 2013, reflected last night:
“A small band of contractors who used tax mitigation schemes – which may have been legal at the time of use – will be hard hit by this Budget, because the ‘pay-up first’ avoidance rule is going ahead full pelt.
“But the typical contractor, who runs their own limited company or who operates through an umbrella company, has been given no new measures to contend with and, in that regard, Budget 2014 was positive.”
Budget 2014: a case of ‘as you were’ for most contractors
In line with Mr Dolan’s reading of the Budget, there were no new measures to strengthen IR35; the small companies profits’ rate will still be 20% in 2015 and the VAT registration threshold will rise (as it usually does every April) to £81,000.
Also from next month, the crackdown on onshore intermediaries who disguise ‘false self-employment’ will go ahead, as will the planned strengthening of legislation to stop offshore employment intermediaries from dodging income tax and NICs.
Keeping its eye on those who feign employment as self-employment, April 2014 will also see the government bring in legislation to counter the disguising of employment relationships in limited liability partnerships (LLPs).
Another crackdown that Autumn Statement 2013 threatened but Budget 2014 confirms will be implemented relates to a small number of high earning non-domiciled individuals, who avoid tax by artificially dividing the duties of one employment between the UK and overseas.
More positive examples of the government reinforcing its stance relate to business rates in Enterprise Zones (the discounts will be extended for another three years) and, more helpful to the typical contractor, Help to Buy has been renewed until 2020. This boost to would-be home buyers is elaborated on ContractorUK today by Tony Harris, an IFA specialising in contractors and the self-employed.
Budget 2014: Where contractors/freelancers, and their clients, may be the winners
In recognition of computer coder Alan Turing, the government said yesterday it would invest £42million in setting up the Alan Turing Institute, under a brief to identify and analyse useful insights in Big Data and Algorithm research.
“Data scientists are what computer programmers were to the UK economy in the nineties,” said KPMG’s head of digital and analytics, Alwin Magimay, welcoming the announcement.
“We as a nation need to industrialise this discipline to ensure that British business can prosper from understanding the potential of the data and turn it into a competitive business advantage.”
He added: “The investment of £42m is a powerful signal to businesses, academic institutions and investors to sit up and realise that big data isn't just a term coined by the technology world, but that it presents a real opportunity for UK business to gain value from the abundance of data being created in a digital and connected world.”
Other state investments announced at Budget 2014 include a move to make permanent the Seed Enterprise Investment Scheme. Introduced in 2012 to help small, early-stage limited companies, SEIS lets them raise equity finance by offering a range of tax reliefs to individual investors who buy new shares in such start-ups.
“This is good news for entrepreneurs and investors alike,” endorsed Daniel Mepham at ClearSky Accounting, an accountancy firm serving freelance professionals. “I have seen a few contractors use their war chest to invest, so the measure could be of benefit to those”.
Similarly, he said, in that a handful of the most ambitious contractor companies may benefit, the government has boosted the Annual Investment Allowance from £250,000 to £500,000.
“A few might do, but most contractors won’t have capital expenditure near the needed £250,000. Nonetheless, this boost does demonstrate further support from the chancellor for UK enterprise in general,” said Mepham.
He added: “For those businesses with suitably large capital expenditure, consideration should be given to whether deferring expenditure into 2014/15 could be advantageous.”
Though a tax charity, the Association of Taxation Technicians, advises that companies eyeing purchases of equipment under the AIA should bear in mind that the new allowance, unlike the SEIS, has not been made permanent.
“[Under yesterday’s] announcement, the new £500,000 limit will run until 31st December 2015 before reverting to the ongoing limit of £25,000,” warned ATT president Yvette Nunn.
“We think that it would be really helpful for the SME sector if the government indicated now what will happen after 31st December 2015. It is inconceivable that the limit will really drop from £500,000 to £25,000 but that is how things will stand after Finance Act 2014 unless clarification is provided.
“If the government sets out now what will happen from 1st January 2016, businesses will be able to plan sensibly – and that will benefit the whole of UK plc.”
Yet the CBI is already on-side. Alongside an announced rise yesterday in the R&D tax credit for SMEs, it says the AIA going up and the SEIS becoming permanent collectively puts “wind in the sails of business investment”.
As a vocal campaigner for UK tax competitiveness, the employers’ organisation will be closely watching Autumn Statement 2014, when the government yesterday said it would respond to a report by the OTS on making Britain’s tax administration more competitive.
Already, however, the OTS has published its recommendations on employee benefits and expenses, only four of which Budget 2014 says will now be put out to consultation for affected parties to have their say.
Accountants at ClearSky are generally in favour of the four proposed simplifications to benefits and expenses -- scrapping the £8,500 threshold, voluntary payrolling of benefits, a trivial benefits exemption and a general exemption.
“But the proposal to remove the £8,500 threshold for the taxation of employee benefits will not affect the majority of contractors because as [limited company] directors, they are already excluded,” clarified Mr Mepham.
“[Overall], the decision announced by the government [to consult on these four simplifications] is a drop in the ocean compared to the range of reforms that could be implemented in this area.”
There were additional tax and monetary changes announced by the chancellor at Budget 2014:
- The collection of NICs for the self-employed will be simplified by collecting Class 2 NICs through the self-assessment process. This will benefit freelancers working as sole traders once the simplification is made (from April 2016).
- The starting threshold at which people pay tax at 40p in the £1 will be raised from £41,450 to £41,865 from next month. Next April it will rise further, to £42, 285.
- A new online system to enable people in financial difficulty to set up a payment plan for self-assessed income tax will be introduced. Emily Coltman FCA, chief accountant at online accountancy solution FreeAgent, explained: “There was no additional information about this, so it’ll be interesting to see how flexible HMRC are prepared to be on this. For example when it comes to payment terms, will they expect payment of a £5,000 debt at £50 per month? Only time will tell.”
- The UK’s childcare voucher scheme will be extended to the self-employed. This will benefit freelancers working as sole traders, not contractors running their own limited companies.
Budget 2014: Where contractors/freelancers, and their clients, may be the losers
The chancellor intends to give HMRC the power to take money directly from the bank and building society accounts, including ISAs, of tax debtors who owe more than £1,000 in tax or tax credits.
The Low Incomes Tax Reform Group criticised such an “unprecedented” power for the UK taxman, for not including any judicial or other safeguards, except for the Revenue stipulating that it would always leave a minimum of £5,000 in the accounts it targets.
The group said: “People who owe HMRC £1,000 or just over may simply be people on low incomes or low wages who have got into difficulties and are in debt not only to HMRC but also to others, notably public utilities.
“To let HMRC raid their bank accounts without safeguards or recourse to the courts – or with inadequate safeguards – would be to flout the rule of law in a manner unworthy of a public service body. It is not the same as seizing physical goods, it is depriving the debtor of the very means to live.”
Anthony Thomas, LITRG’s chairman, regards the move to strengthen HMRC’s recovery powers in this way as “hugely worrying” because the department “continually fails to deal with taxpayers properly or fairly.”
It is this same trend of HMRC not being able to operate “error-free” that explains why The Low Tax Group, an adviser to contractors, says it’s concerned about the tax authority’s other new weapon – the ‘pay-up first’ power against taxpayers accused of avoidance.
As stated at this piece’s introduction, those who face being on the receiving end of this accelerated payment provision are the clearest losers in the temporary workforce of Budget 2014. Nonetheless, those freelance professionals caught directly (or unintentionally) in the Revenue’s assault on onshore and offshore employment intermediaries will also suffer.
Other anti-avoidance measures announced yesterday by the chancellor include a crackdown on the purchasing of property via companies, and fresh action to block arrangements involving payments between companies within a group which transfer profits to avoid tax. The government will also consult on how to best tackle abuse of Venture Capital Trusts and Enterprise Investment Schemes.
To underpin this raft of anti-avoidance measures, the government used Budget 2014 to announce that HMRC’s compliance yield target is to be increased by a total of £1.6bn over the coming two financial years.
Budget 2014: Contractors, you may have missed:
- Following OTS’s recommendations on the tax treatment of travel and subsistence expenses, the government will launch its own review of these expenses rules, and will seek evidence on remuneration practices to inform “any” future reforms
- The current relief for R&D costs for loss-making businesses, currently 11%, will go up to 14.5%
- Draw up degree-level apprenticeships, and support SMEs with 100,000 apprentices
- Promise to consult on a new law to help match SMEs with alternative lenders, where SMEs have been turned down for a business loan
- Pour £200m into pothole repairs
- Freeze fuel duty, give a bigger discount to ‘green’ vehicles and take a penny off a pint
- Hike the tax rates on company cars by 2% in both 2017-18 and 2018-19
- Set up £150m fund for the regeneration of large housing estates
- Offer manufacturers a £7bn package to cut energy bills
- Double the amount of funds available to UK exporters to £3m
- Use new technology against counterfeiting at the Royal Mint to create a new £1 coin
- For the oil and gas sector, introduce a new allowance for ultra high pressure, high temperature clusters
- Provide £106m over five years for 20 extra Centres for Doctoral Training, so universities, businesses and government can research new technologies
- Offer £60m for new low-carbon innovation to support carbon capture storage technologies.
Editor’s Note: Budget 2014 announcements relating to mortgages, pensions and savings for contractors are covered separately on CUK today by IFA Tony Harris in What Budget 2014 means for contractors' pockets.