Changes to contracting from April 2016: overview
Several key changes for contractors and contracting came into force this month, further to other changes which may affect you due to the new tax year. The big changes are as follows:
All taxpayers in receipt of dividends in excess of £5,000 will see their tax liability on dividends increase. A basic rate taxpayer will pay tax at 7.5% on dividends over £5,000; a higher rate taxpayer will pay tax at 32.5% and an additional rate taxpayer at 38.1%. Timing and other considerations have been advised as part of a strategy to maximise take-home pay.
Travel and Subsistence expenses
Umbrella company contractors can no longer claim tax relief on T&S expenses, where there do not come forward to HMRC to prove they are not Supervised, Directed or Controlled. PSC contractors outside IR35 are unaffected, unlike managed PSC contractors who must test for ‘SDC.’
Overdrawn loan accounts
The rate of tax chargeable on loans or advances to, or arrangements conferring benefits on, participators made by close companies has now been linked to the higher dividend rate. The rate will be increased from 25% to 32.5%. The new rate will apply to loans made or benefits conferred on or after Wednesday April 6th 2016. This represents a hefty 30% tax hike.
Since April 6th 2016, there is no longer a requirement for employers who reimburse business expenses or pay professional subscriptions to have to report such reimbursements via P11D.
Employers must still ensure that expenses are "wholly, exclusively and necessarily" incurred by their employees in the performance of their duties, and expenses must continue to be receipted and authorised. This is likely to mean that single-employee companies are unlikely to be able to take advantage of these new rules, as they self authorise their own expenses.
Kingston Smith advises that where an employer has an existing agreement with HMRC to pay their employees at a fixed rate (e.g. daily travel allowance or overnight meal allowance), this can continue so long as the agreement was made post April 6th 2011. However, an application needs to be made to HMRC to let them know the employer would like the arrangement to continue.
The adviser adds that where no existing agreement is in place and the employer wants to pay their employees a fixed rate above HMRC’s benchmark rates, a specific application to HMRC will be required, supported by evidence of the costs incurred by the employee.
Any individual receiving a distribution on a winding-up of a company, including a contractor who is the sole employee and company director winding up their PSC, could now face a tax rate chargeable to income tax of up to 38.1%. The conditions-based rules will apply to distributions made after April 5th 2016 (regardless of whether the liquidation commences before or after that date).
Since April 6th 2016, employers will get the option from HMRC to process benefits in kind through the payroll; such BIKs include company cars, fuel benefits; private medical insurance and taxable subscriptions.
Also since Wednesday 6th, a trivial benefits exemption is now in effect, permitting employers who provide modest entertainment, such as drinks and meals, to their employees to no longer need to include the majority of these items within their PAYE Settlement Agreement.
Another recommendation that was made by the OTS – scrapping the £8,500 threshold for reporting purposes – became law on Wednesday too. Also consigned to history is form P9D.
The concept of ‘fair bargain’ has been introduced. Under it, HMRC can impose a tax charge for benefits such as cars, loans or living accommodation even where there is a fair bargain between employer and employee for the provision of the benefits in question.
New anti-avoidance measures announced at Budget 2016 and effective from Wednesday include those aimed at the artificial use of companies to turn revenue profits into capital payments and so reduce the tax payable. The amendments are mainly targeted at what are usually referred to as ‘moneyboxing’ and ‘phoenixism.’
The Revenue’s digital personal tax accounts will now start to be introduced, ahead of an anticipated wider rollout to all small businesses, the self-employed and landlords.
Numerous new guides published by HMRC on Wednesday April 6th include advice for Plan B contractors -- Self-Assessment helpsheet if you’ve got more than one business; Rules for Claiming Entrepreneurs’ Relief and What to do if IR35 applies. The latter follows an update to the library of the House of Commons – ‘Personal Service Companies: recent debate,’ a downloadable report on the developments around IR35 since its introduction in 2000.
Lower rates of Capital Gains Tax also became effective from this month, but the reductions will not apply to residential property sales of second homes or buy-to-let properties.
Individual Savings Accounts got more flexible on Wednesday April 6th 2016, as some holders will soon be allowed to take money out of their account and replace it, without using up any of their tax-free annual allowance -- providing they do so in the same tax year. However some providers have already said they will not offer this new flexibility for ISAs, which can now hold a maximum of £15,240 (rising to £20,000 in 2017).
Also since Wednesday, the new Innovative Finance ISA comes in, although it was not available from all peer-to-peer lenders on the day. Still, if you lend money via P2P platforms, you should shortly be able to use an ‘IF ISA’ to legally duck tax on any interest.
A new £1,000 tax-free allowance for savings income has taken effect, although it has been halved (£500) for higher rate taxpayers and does not apply to additional rate taxpayers.
The lifetime pension allowance has been reduced, meaning that the most you can amass in a pension before paying a hefty tax rate of 55% is down from £1.25m to £1m.
The £10,600 tax-free personal allowance has notched up to £11,000 (for 2016-17), with one result being that the higher rate tax threshold is up too -- to £43,000 (for 2016-17).
The NI Employment Allowance (a relief worth up to £3,000 a year) has been removed from limited company directors who are their company’s only paid employee. The NI EA is also not eligible for PSCs with only deemed payments of employment income under IR35.