Budget 2017 bruises PSCs with dividend allowance cut

Philip Hammond backed “ordinary working families” at Budget 2017 delivered earlier today, but bruised them if they are self-employed or work through a limited company.

To eventually raise £930million a year from the latter (known as PSCs), the chancellor said he will cut the tax-free dividend allowance of £5,000 to a meagre £2,000 from April next year.

It means such PSCs will receive £3,000 less in tax-free income from next April and, like the £5k allowance, the new allowance will not reduce a taxpayer’s total income for tax purposes.

'Lesser evil'

But Martin Hesketh, CEO of Brookson, believes the paring back of the tax-free allowance is almost ‘the lesser evil,’ given that extending the off-payroll rules to all PSCs was apparently on the table.

“This measure [to reduce the tax-free dividend allowance] will reduce the take-home pay for limited company contractors from April 2018 and initially, it sounds like bad news.

“But if it means HMRC is comfortable that it will raise enough revenue to remove the need to extend the IR35 changes in the public sector into the private one, then I think it’s a fair outcome”.

The move is even more "fair" -- a theme of Budget 2017 -- when viewed through the lens of the incoming cuts to corporation tax (reducing to 19%, then 17% in 2020), Mr Hesketh said.

'No consultation'

However, an unfairness from Mr Hammond today was his pushing through of the £3,000 cut to the tax-free allowance without asking affected parties, says contractor body IPSE.

“Changes should only come after a thorough consultation with the business community, which has not taken place,” said the Association of Independent Professionals and the Self-Employed.

To justify the £3,000 cut, the government said it partly helps reduce the tax difference that the self-employed and those working through a company enjoy, compared to those who don’t.

To this end, the chancellor says the government will hike the rate of Class 4 NIC for self-employed sole traders from 9% to 10% from April 2018, and then to 11% from April 2019. 

“There is a lot of emphasis upon fairness and everybody paying,” said Rhys Thomas of WTT Consulting. “There is a lot of emphasis upon self-employment being chosen for tax purposes as being unfair.

“Such rules, if applied and enforced by HMRC when historic arrangements were disclosed to them, would have prevented the damage, fiscal and reputational, that is now being visited upon the UK and its economy.” 

Off-payroll rule fear

But it is not the Revenue’s lack of enforcement that frightens WTT, a tax investigations specialist, it is the department’s lack of responsiveness to the off-payroll rules.

“We fear the [April 6th measures] in the public sector... are ignoring the consultation responses, and ignoring claims that insufficient time has been allowed for its introduction.

[They’re also] ignoring the key fact that government will either pay more to retain the workers they have, or face losing highly-qualified and experienced people to be replaced with the less able”.

Budget 2017 does not add new details to the April reforms to IR35, but a new ‘policy paper’ summarising their scope, and totting up their fiscal impact, was published today.

“This paper just really confirms what we know and has an impact assessment,” reflected status specialists Bauer & Cottrell, which regards the paper as a rejection to calls to delay the reforms.

'No U-turn'

FreeAgent, an online accounting platform for one-person ventures, confirmed: “[It’s] disappointing to see that there has been no U-turn over the forthcoming reforms to IR35.

“As of April 6th [these] will see public sector employers having to deduct tax and national insurance contributions from contractors' pay at source, rather than allowing them to defer and claim expenses.”

IR35 advisory The Law Place said: “The [new] policy paper reiterates the planned abolition of the 5% allowance without taking into account the optional Employment Status Service tool.

“Still in beta stage, [the tool] is unreliable and seemingly not based on IR35 case law. But where a personal service company disagrees with the outcome of the ESS any expenses incurred in seeking to have the outcome reversed cannot be offset against tax.”

Also on expenses, the HMRC paper adds that: "As a result of feedback received during the technical consultation, it will be optional for the agency or public sector body to take account of the worker’s expenses when calculating the tax due."

'Leave the sector alone'

At Brookson, a contractor accountancy firm, the “hope” is that nothing new in the Budget on complying with the Intermediaries legislation signals that the government’s scrutiny of flexible professionals is over.

“As the government have now tackled false self-employment, umbrella company travel and subsistence expenses, IR35 compliance…[and] flat rate VAT scheme, [hopefully] it is time to leave the sector alone for the foreseeable future”, the firm said.

Contractor tax advisers at inniAccounts aren’t as optimistic. “[Budget 2017] showed the government’s clear intent to clampdown on those who use contracting merely as a tax-avoiding technique," they said. "We expect to see more and more of these measures in the future.”

Joined-up thinking

And Derek Kelly, chief executive of SJD Accountancy, sees cunning in the government’s thinking that suggests that its tax officials remain very watchful.

“Philip Hammond has today been smart, as a number of self-employed people would have probably looked to incorporate their business and avoid paying the additional self-employed tax. 

“By reducing the dividend allowance he has made it less attractive for these people to incorporate a business,” he said.

To another contractor accountancy firm, DNS Associates, the government’s motivation is clear. “The reducing of the dividend allowance…[is] slowly but progressively eroding the benefits of working through your own company.

“Overall, and in conjunction with Autumn Statement 2016 and Budget 2015, everything they are doing is to stop the incorporation for tax benefit,” DNS said.

Attack on all business soloists

Helen Christopher, operations director at accountancy company Orange Genie agrees, but says the government has got it wrong.

“Hammond is keen to point out that the tax-free allowance has encouraged unfairness, with ‘tax motivated incorporations’ increasing.  

“We don’t agree; last year’s off-payroll consultation cited tax efficiency as only one of many reasons for incorporation.”

The company's CEO Graham Fisher, who is today scheduled to meet Mr Hammond following the Budget, said: “These moves [against dividends for PSCs and NI for sole traders] feel like another attack on individuals choosing to operate as their own business.”

'Business as usual'

Indeed, the chancellor ought to have just been honest and simply changed the name of ‘National Insurance Contributions’ to ‘Additional Tax for Running your own Business,’ mused Mr Kelly, who is also the boss of ClearSky Contractor Accounting.

“The government continues to misunderstand the vital role that professional contractors play in the UK,” he said. “[But rest assured, these] changes in tax will not stop the many benefits that both individuals and the country receive from being their own boss.”

James Poyser, inni’s managing director confirmed: “While the change to dividends will result in PSCs paying more tax, it’s unlikely to have significant impacts on the majority of contractors and consultants.

“So, for those of us who have made the move to contracting as a lifestyle choice; one that offers more flexibility, reward, work-life balance and access to unique or specialist projects, then the next tax year will be ‘business as usual.’”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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