Osborne in four-fold attack on contractors
George Osborne launched a four-fold attack on the contractor community in his Summer Budget 2015, delivered earlier today, Wednesday July 8.
First, the chancellor says he will make it more taxing for people who pay themselves in dividends by replacing the dividend tax credit with a new tax-free allowance of £5,000.
Although the Treasury says this will ensure that “ordinary investors with smaller portfolios and modest dividend income” see no change in their tax liability, the rates are being hiked.
In fact, the rates of dividend tax will be set at 7.5%, 32.5% and 38.1%, representing an increase of 7.5% where dividend income exceeds £5,000, says the Budget report on p44 (1.185).
For his second raid on contractors who are the sole employee of their own limited company, Mr Osborne says he will prevent them from claiming the NICs Employment Allowance.
At present, any contractor operating a personal service company can offset the £2,000 allowance against employers’ NIC arising on ordinary salary.
In other words, PSC contractors who pay themselves any salary are currently entitled to claim the EA if they have actually paid any employers’ NIC. Mr Osborne will put a stop to this.
He will also proceed with the March 2015 Budget plan to ban tax relief on travel and subsistence expenses, notably for those contractors who are “supervised, directed or controlled.” A consultation document has now been released.
This represents Osborne’s third assault on the contractor community, who are reminded at 2.182 of the Budget that the ban will bite from April 2016, for both PSC and umbrella users.
Fourthly, the chancellor says IR35 will - again - be looked at, seemingly because it is not working well enough. This motive for action was hinted at by business advisory Moore Stephens on the eve of the Budget.
Specifically, at page 96, chapter 2.183 of today's Budget report, the Treasury says:
“The government will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment. A discussion document will be published after Summer Budget 2015.”
Martyn Valentine, founder of IR35 advisory the Law Place said: “Limited company contractors should be aware that complacency is no longer an option regarding potential IR35 liability.
“[Because] once again personal service companies, i.e. limited company contractors, are [going to be] under scrutiny.”
Some contractors might hope the envisioned “reform” to IR35 could be an opportunity to clarify the legislation – as an adviser hoped – but the government’s wording suggests otherwise.
“As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough…the government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation.”
Also on pages 43-44 of the Budget red book, the Treasury states: “The government wants to find a solution that protects the Exchequer and improves fairness in the system.”
Despite the mention of fairness, Seb Maley of employment status firm Qdos Consulting, told ContractorUK that the announcement on IR35 reform will “certainly be unnerving to contractors.”
He added: “HMRC’s recent focus has been on supervision, direction and control – so perhaps this is something that will take greater prominence with IR35.
“Unfortunately 'SDC' is a grey area in itself, so let’s hope any potential solution has been properly thought through. Ultimately the changes to dividend tax could lessen the financial impact of IR35 anyway, but contractors will need time to get their heads around what the Budget is going to mean for them. It’s certainly going to cause a shake-up.”
Maley is not the only adviser to consider how the announced changes to dividends will interact with the pledge to review IR35, but he is alone in seeing an upside.
“This fundamentally isn't a great day for contractors,” Martin Hesketh, managing director of Brookson told ContractorUK in a statement.“Yet another IR35 review [has been announced], as well as introducing significant changes to the way dividends are taxed - each of these is likely to impact contractors and freelancers.
“Changes were also announced to the Employment Allowance…[so] all [in all], contractors are likely to take home less of their hard-earned money, and the[n there’s the] proposals on travel and subsistence tax relief”.
Paul Spindler, partner at Kingston Smith, agrees that contractors are clear losers of a Budget that claims to be in support of “working people” – as the chancellor announced in the House of Commons.
Mr Spindler told ContractorUK: “Although the Budget was hailed as one for ‘workers’ this doesn’t seem to apply to contractors operating through their own limited company.
“It has long been a practice for the contractor to receive a salary, and dividends to top up any needs for cash. The Budget has made the cost of taking those dividends more expensive by tinkering with the rate at which dividends are now taxed.”
He signalled that the Budget is unlikely to please contractors’ accountants either. Firstly, the calculations for any particular individual on the lowest tax split between salary and dividends will need a calculator and a spreadsheet. And secondly, accountants will have to "wait to see" if the restrictions to the EA will be extended to include employees who are associates of the directors.
One of those contractor accountants, Mr Hesketh, summed up the implications of Summer Budget 2015 for his clients: “In our view, this is an ill thought-through [Budget] and [contains] ill-informed move[s] by the government.”
Roger Sinclair, legal consultant at contracts advisory Egos, agrees. He told ContractorUK: “[The dividend tax hike] coupled with the removal of the NI employment allowance for companies where the sole director is the only employee - suggests to me that this is a bad budget for contractors. The devil will be in the detail, of course.”
More positively for PSC contractors, and potenitally helping to offset the higher costs of running a limited company, the Budget commits to lowering corporation tax for both large and small firms alike, as the rate will be cut to 19% in 2017, and to 18% in 2020.
Editor's Note: Further Reading on Summer Budget 2015 -