Budget 2015: What contractors need to know
Contractors under client supervision, direction and control are the freelance labour market’s biggest losers of Budget 2015, as reported yesterday and today, as they will lose tax relief on travel and subsistence expenses from April 2016.
The relevant chapter from Budget 2015 is reproduced below. The other announcements of the Budget potentially affecting contractors follow that reproduction.
Budget announcements affecting contractors’ personal finances are covered separately on ContractorUK today by an IFA.
1. Umbrella companies and employment intermediaries
- Autumn Statement 2014 announced that the government would review the growing use of overarching contracts of employment that allow some temporary workers and their employers to benefit from tax relief for home-to-work travel expenses, relief not generally available to other workers. This is unfair.
- As a result of the review, the government will change the rules to restrict travel and subsistence relief for workers engaged through an employment intermediary, such as an umbrella company or a personal service company, and under the supervision, direction and control of the end-user. This will take effect from April 2016 following a consultation on the detail of the changes. It will level the playing field between employment businesses that seek to lower their costs by using these arrangements and those that do not.
- Stakeholders have also raised concerns that individuals do not understand how their take-home pay is affected by these arrangements. The government wants employment intermediaries to provide workers with greater transparency on how they are employed, and what they are being paid. The Department of Business Innovation and Skills will consult on these proposals on transparency later this year.
2. Other new anti-avoidance measures
Alongside new anti-evasion measures, and the above expenses clampdown (to close a £400m ‘loophole’) the following anti-avoidance measures are projected to net £3.1bn. The government will:
- Target structures set up so that people with only a small indirect stake in a trading company can benefit from Entrepreneurs’ Relief.
- Put in place measures to ensure Entrepreneurs’ Relief on the disposal of personal assets used in a business is only available when someone is making a “meaningful withdrawal” from that business.
- Change corporation tax rules to prevent contrived loss arrangements.
- Introduce a penalty based on the amount of tax that is tackled by the GAAR.
- Put in place tougher measures for those who “persistently enter into tax avoidance schemes that fail,” and develop further measures to publish the names of such avoiders and to tackle avoiders who repeatedly abuse reliefs.
- Widen the current scope of the Promoters of Tax Avoidance Schemes regime by bringing in promoters whose schemes are regularly defeated by HMRC.
- Launch a review on the avoidance of Inheritance Tax through the use of deeds of variation.
- Tighten the DOTAS regime by making six improvements.
- Stop businesses taking account of foreign branches when calculating how much VAT on overhead costs they can reclaim in the UK.
- Legislate next week for the so-called ‘Google Tax’, formally the Diverted Profits Tax (DPT), and bring it into effect at the start of next month (April 2015).
“The government announced…that the legislation introducing DPT has been revised to narrow the notification requirement,” said Glyn Fullelove of the Chartered Institute of Taxation.
“This is welcome as the legislation published in December would have meant that many companies who would not be expected to pay any DPT would have been faced with a substantial amount of compliance, as the notification criteria were significantly broader than the rules for actually charging the tax.”
He added: “We will see the revised legislation in the Finance Bill next week. We hope that the changes have gone far enough to ensure that the many businesses which are not the target of the new rules, will not have to provide unnecessary notifications to HMRC.”
3. Anti-evasion measures
Alongside the above anti-avoidance measures, the following anti-evasion measures should net £3.1bn. These measures to combat evasion were alluded to by the chancellor before the Budget. The government will:
- Lay before parliament regulations giving effect to agreement among 92 countries to exchange information on bank accounts automatically, every year.
- Toughen sanctions for those who continue to evade tax by closing the existing disclosure facilities for tax evaders early.
- Offer a tougher ‘last chance’ disclosure facility between 2016 and mid-2017, with penalties of at least 30% on top of tax owed and interest and with no immunity from criminal prosecutions (in appropriate cases).
4. Self-Employment, Freelancing and SMEs
And fortunately for such one-person businesses, the mentions they got -- four in total -- were all positive. Mr Osborne even dedicated his Budget to them (among other voters), saying, “This Budget backs the self-employed [and] the small business-owner.” The chancellor’s two showpiece announcements are as follows:
Goodbye annual tax return; hello digital accounts
- The government will scrap what the chancellor called the “costly, complex and time-consuming” self-assessment tax return, to reduce tax administration for 12m people.
The chancellor said: “Millions of individuals will have the information the Revenue needs automatically uploaded into new digital tax accounts.
“A minority with the most complex tax affairs will be able to manage their account online. Businesses will feel like they are paying a simple, single business tax – and again, for most, the information needed will be automatically received.”
Self-employment body IPSE welcomed the announcement: “A more flexible returns system to replace the current outdated model is something that we have long been calling for,” it said.
“Annual tax returns place a heavy burden on the self-employed, who must keep accurate records over a long period of time and then compress months of expenses into one return.”
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants also backed the death of the traditional tax return.
“This move to the brave new world of digital tax returns will allow people to have a holistic view across the range of taxes they pay,” he said.
“As well as settling their taxes, taxpayers will be able to amend their tax codes and even pay their parking fines online”.
But he cautioned that as many self-assessors are only used to assessing via the post, they will need “access to resources” to help them ‘go digital’. If not, he fears, they’ll be “left behind.”
Indeed, there should still be the option to complete a physical return on paper and send it using the postal system, according to the Low Incomes Tax Reform Group (LITRG).
Aware of the recent ruling that HMRC broke the law by mandating online filing for VAT, the group said: “For the substantial minority who have never accessed the internet, paper must remain a valid option and not an afterthought. No-one should be forced to file online to comply with their tax obligations.”
An accountant serving freelance workers, ClearSky Contractor Accounting, sounded more supportive:
“This is a positive step, and it’s great to see a desire among policymakers to make life easier for independent professionals by moving systems belatedly into the 21st century.”
But ClearSky’s boss Derek Kelly doesn’t see it as a silver bullet. “Once implemented,” he said, “I don’t think the new system will make a great deal of difference to self-employed professionals limited company contractors and small business owners.
“These individuals are already able to file their tax returns online, well in advance of the January 31 deadline. Human nature dictates, however, that many leave it until the last minute. It’s extremely difficult to see this changing.”
A similarly assessment came from the Chartered Institute of Taxation. “[This] may not be the revolutionary simplification it is billed to be for all taxpayers,” the CIOT cautioned.
“Those taxpayers with relatively simple tax affairs, for example employees and pensioners who pay their tax through PAYE, stand to gain most from this.
“But those with more challenging tax affairs, for example the self-employed and landlords, will still need to apply complex tax rules to calculate their income and will still then need to declare it to HMRC.”
However Mr Osborne seemed very pleased with his move, which was recommended by the OTS. “We believe people should be working for themselves, not working for the taxman,” the chancellor said. “Tax really doesn’t have to be taxing, and this spells the death of the annual tax return.”
Goodbye Class 2 NIC
- The government will abolish Class 2 National Insurance contributions for the self-employed, in a move to be made in the next parliament to support 5m people by simplifying tax administration.
Simon McVicker, a director of IPSE welcomed the abolishment: “The removal of Class 2 NICs will be a big boost to those working as self-employed. It represents a major simplification of the tax system which will save them around £143 year.”
Emily Coltman FCA, chief accountant at FreeAgent, agreed: “This simplification is welcome, as having two kinds of National Insurance to pay is confusing for partners and the self-employed.”
The LITRG was also supportive but not unreservedly:“Abolishing Class 2 NICs will be a welcome simplification, particularly to those for whom the requirement to register for Class 2 while also paying Class 4 has long been a source of confusion and a bureaucratic trap. But it is essential that nobody’s contributory benefits entitlement is eroded by the change,” it said.
The technical director of the LITRG, Robin Williamson, added: “Although few details have been announced, the self-employed will continue to pay Class 4 NIC which will subsequently be reformed to include a contributory benefit test. We welcome the opportunity to see more details and comment on the proposed changes in the promised consultation later this year.”
Other announcements at Budget 2015 for freelancers, the self-employed and SMEs:
- The government welcomes the publication of the “significant” review of employment status by the Office of Tax Simplification (OTS) and will respond to the recommendations made in the next parliament.
- A package of measures will be unveiled to improve the accessibility of R&D tax credits for smaller business. This R&D package will include new guidance for smaller firms and set out a “roadmap” for further improvements over the next 2 years.
- The Annual Investment Allowance will be set at a “much more generous rate” than £25,000 (but no promise to keep it at £500,000), and the allowance is to be set at Autumn Statement 2015.Tax charity the ATT warns that the deferral, and the current lack of confidence in the AIA as a result, could lead to poor decision-making by businesses.
- Changes to the Enterprise Investment Scheme and Venture Capital Trust rules will be made to ensure they are compliant with the latest state aid rules. These changes include doubling the permitted maximum size of an eligible company’s workforce provided the company is a knowledge-intensive company; and introducing a new qualifying condition that the company is less than 12 years old at the time of receiving the relevant investment (unless the investment will lead to a substantial change in the company’s activity).
- A reduction is to be made in the increase to the company car tax of low emission vehicles to encourage their usage (while hiking other rates by 3% in 2019/20).
- The Prompt Payment Code is to be extended to cover wider poor payment practices, for example in relation to the use of supplier lists.
- Similarly, the government will be “asking” its strategic suppliers to report quarterly on their payment practices from April, and “asking” all central government departments to do the same (also from next month).
- Information for SMEs on accessing and using legal services is to be included on the Citizens Advice and GREAT business websites.
- The government will inject an extra £7.5m of funding in 2015-16 to UK Trade and Investment for its work to maximise trade and investment links with China.
- Support to be given to the International Festival for Business in Liverpool in the shape of £1.5m in funds.
- A review of SME business rates to be carried out.
- Employers to be put in control of the government funding for the training that apprentices need, by introducing an Apprenticeship Voucher.
- The government will expand eight existing enterprise zones and create two new ones (subject to business cases) in Plymouth and Blackpool.
5. Technology/IT announcements
The government will:
- Support the development of young, innovative tech businesses through an £11m investment into Entrepreneur Hubs in Manchester, Leeds and Sheffield.
- Commit to a new ambition that ultrafast broadband of at least 100 Mbps should be available to nearly all UK premises, and take further action to support the delivery of broadband in rural areas.
- Provide up to £600m to support the delivery of the change of use of 700MHz spectrum, and centralise the operational management of public sector spectrum, and reset the release target.
- Fast forward proposals for competitive tendering of onshore electricity transmission infrastructure (to make legislation in next parliament).
- Ensure academics/researchers are appropriately rewarded when they contribute towards valuable IP used in spin-out companies, by reviewing availability of Entrepreneurs’ Relief on disposals by such persons of shares in such companies.
- Invest £40 million to develop Internet of Things technologies through large scale demonstrator programmes, business incubator space and a research centre. The funding will focus on healthcare, social care and smart cities.
- Ensure regulators the FCA and PRA identify ways to support the adoption of new technologies to facilitate the delivery of regulatory requirements, and report to the Treasury later in 2015. The regulators will also support a new five-year FinTech initiative.
- Pour in £100m for Research and Development into Intelligent Mobility, which will focus on enhancing the development of driverless car technology and the systems required to implement and adopt the technology, such as telecommunications.
- Launch a new research initiative which will bring together the research councils, Alan Turing Institute and Digital Catapult with industry in order to address the research opportunities and challenges for digital currency technology. To help, boost research funding in digital currency technology by £10m.
- Work with the British Standards Institution and the digital currency industry to develop voluntary standards for consumer protection.
- Explore with LINK how “intelligent” cash machines can be made by upgrading existing ATMs.
- Offer £7.4m in funding to support libraries in England to provide internet access and Wi-Fi.
6. Additional Budget 2015 announcements potentially affecting contractors
- VAT charges on private sector contractors who bid for taxpayer-backed work will be removed (when they pitch the cost of a contract to non-departmental public bodies).
- To help the North Sea Oil and Gas industry, the government will provide a five-tier package of support estimated to boost it by £1.3bn. Measures include cutting both the supplementary charge to 20% (from 30% currently) and the PRT to 30% (from 50% currently).
- Negotiations will begin on new ‘city deals’ for Aberdeen and Inverness.
- Greater freedoms to research institutes will be offered to ensure they can attract the “brightest minds; make timely investments in cutting edge equipment and re-invest commercial income.”
- Anti-money laundering regulations to digital currency exchanges in the UK will be applied, with a view to supporting innovation and preventing criminal use.
- A hike in the Bank Levy from 0.156% to 0.210% will take effect from April 1st 2015, and a sale will be launched of £13bn of the mortgage assets still held from the bailouts of Northern Rock and of Bradford and Bingley.
- The government will increase the maximum annual donation amount which can be claimed through the Gift Aid Small Donation Scheme to £8,000.