Budget 2016: 13 changes, unlucky for some contractors
While some PSCs may be glad to pay less NI than if they were caught by IR35 under today’s rules, they all face mandatory IR35 testing at their public client’s behest from April 2017.
The relevant chapter from Budget 2016 is reproduced below. Twelve other areas potentially affecting contractors (PSC and umbrella) that the Budget covers follow that reproduction.
1. Off payroll working in the public sector
From April 2017, the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies in the public sector. The rules will remain unchanged for those working in the private sector. The government will consult on a clearer and simpler set of tests and online tools.
HMRC has released a technical note elaborating on the changes. The note, Off-payroll working in the public sector: reforming the intermediaries legislation, includes examples.
2. T&S legislation
As announced by the government previously, Travel and Subsistence tax relief between home and work will be removed from April 2016. The removal will apply to temporary workers supplied through intermediaries (such as an umbrella company) who are subject to the Supervision, Direction or Control (or the right of SDC) of any person. The removal will apply to PSCs who are caught by IR35, while those who are not caught by IR35 can continue to claim.
3. Dividend tax
Despite appeals to scrap and reduce it, the new dividend tax rate announced last year has now been confirmed. It means that from 2016/17, individuals will have a dividend allowance of £5,000 per year, but suffer higher rates of tax on dividends that don’t fall within this allowance.
In particular, says the Budget at 2.41, the new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
4. National Insurance EA removal
The withdrawal of the NI Employment Allowance for single-person companies will go ahead, with a view to netting the exchequer £70m in 2017-17, rising to £90m in 2020-21.
5. Entrepreneurs’ Relief
Budget 2016 restores ER (subject to conditions) for shares in companies which are members of a trading partnership or co-owners of a trading joint venture company. Also, ER will be restored for “associated disposals” in some circumstances.
In addition, ER is extended to external investors in unquoted companies (subject to conditions).
Government to respond later this month to a consultation that proposed raising the tax on some other capital distributions from the 10% ER rate to 38.1%
6. Capital Gains Tax
The rate of Capital Gains Tax (CGT) from 6th April 2016, has been reduced from 28% to 20% for higher rate tax payers. Basic rate band tax payers will change from 18% to 10%. This does not apply to gains made on the disposal of residential properties.
SJD Accountancy reflected: “For those looking to close their company, a capital distribution will be more tax efficient than an income distribution (dividend), even in cases where Entrepreneurs' Relief cannot be claimed.”
7. Close companies
The Budget increases the tax charge that closely held companies suffer from 25% to 32.5% for loans made from April 6th 2015 to ensure that it keeps pace with the increase in the dividend tax rate. Those planning to take loans from their companies to lessen the blow of higher taxes on dividends “will need to think again,” advises Kingston Smith.
Tthe simplified expenses regime will be changed to ensure that partnerships can fully access the provisions in respect of 'the use of a home' and where business premises are also a home.
Consultation to run on how partnerships calculate their tax liabilities, with a focus on a number of areas where the taxation of partnerships could be seen as uncertain.
9. Disguised Remuneration
A package of measures to tackle Disguised Remuneration (DR) schemes (used to avoid income tax and NICs) will be introduced. A technical consultation on further changes to legislation combating DR will follow, as will a new charge on loans paid through DR schemes which have not been taxed and are still outstanding on April 2019. A consultation has been published by HMRC alongside Budget 2016.
10. Small Companies
- Nearly all of the OTS recommendations from its review of small company taxation will be accepted or considered. The OTS’s recommended ‘look-through’ tax system, and its proposed new asset protection model for the self-employed, will go ahead -- albeit just for further exploration via the OTS.
- Increase Security Tax on Directors Loans from 25% to 32.5%, from April 6th 2016.
- Introduce a Targeted Anti-Avoidance Rule in order to prevent people from opening and closing a company to gain a tax advantage.
- Government to this month publish its response to a consultation on company distributions.
- Consult on how to expand corporation tax deductions for contributions made by limited companies to grassroots sport.
- Invest £71m to make it "quicker and easier" for individuals and small businesses to deal with HMRC.
For big and small firms alike, corporation tax will be cut to 17% by April 2020 (but will stay at 20% from April 2016).
12. Self-employment & Micro-Business
- Abandon Class 2 NICs from 2018.
- Introduce a voluntary ‘pay-as-you-go’ facility for self-employed people (and landlords) to pay their tax from 2018.
- From April 2017, introduce two new £1,000 allowances for property and trading income, to help the likes of Airbnb and eBay users.
Individuals with property income or trading income below the level of allowance will no longer need to declare or pay tax on that income. Those with relevant incomes above £1,000 can benefit by simply deducting the allowance instead of calculating their exact expenses
The Institute of Directors says it backs the allowance, which is likely to help with power tools, driveways and loft storage, but regrets it is for a “very low” amount.
13. Oil & Gas
‘Effectively abolish’ Petroleum Revenue Tax and reduce the supplementary charge for oil companies from 2% to 10% and backdate it to January 2016.