What the election result means for contractor finances
They say a week’s a long time in politics. Eighteen days must therefore be a lifetime -- a calculation that even us accountants had to double-check because it feels so much longer since contractor finances got thrown into the air due to the hung parliament election result, writes Amanda Swales of SimpleTax.
As they are still in office, it is the Conservative party and their policies which still have the most potential to affect contractors. But both the truncated Finance Bill and some discarded Tory manifesto pledges at the Queen’s Speech mean you might no longer be affected, or you might be -- but just a little later than you initially expected.
Dividends
It’s probably the most fiery proposal as far as contractors are concerned, and it does have the potential to burn some of them -- the dividend tax rise. More specifically, it’s the £3,000 reduction in the dividend allowance unveiled at Budget 2017 that has sparked a backlash from contractor business owners.
Let’s take an example. You might earn £30,000 a year, 50% of which comes out as a dividend. Out of that £15,000, you would have only paid £750 to HM Revenue & Customs. Assuming chancellor Philip Hammond gets his way (it was he who announced it in March 2017), that £750 tax bill will increase to £975.
However the measure was dropped from the slimmed down Finance Bill 2017 (it was truncated so the bill could pass before parliament was dissolved). While that might inspire cause for celebration, tax experts like us expect the hike on your dividends to be reintroduced.
IR35
Before exploring another area of tax that PSCs are keeping their eye on, it is worth remembering that the hung parliament result is widely seen as having a dampening effect on tax policy-making. Unpopular measures likely to face challenge or be difficult to get through will be de-prioritised.
So thanks to the Tory government being, as of yesterday, only a minority that will be supported by the DUP on major issues like Brexit, the prospect of extending the off-payroll rules to the private sector is much less “strong and stable” than if the Tories had won a big majority. And also because Theresa May will need as many of her own MPs to push through what she wants, backbench critics of IR35 or other controversial tax measures will irk her by wielding more power. They’ll know she wants them to play ball. Because of that, she’ll limit what she throws at them and how often. For her, the least provocative that ball, the better. So IR35 reform in the private sector has therefore become an outside bet; at least for now. Strange to consider that only in November, it was being described as an “inevitable.”
Corporation Tax
You might not have felt it if you’re a PSC contractor, but the prime minister did actually court small business owners in the run-up to the election. She said she’d bring corporation tax down to 17% -- one of the lowest rates in Europe.
This was supposed to net an extra £4billion for the UK economy, every year. Labour, on the other hand, were targeting an increase in corporation tax to 26%. Jeremy Corbyn’s courtship with PSCs was clearly more reliant on axing Making Tax Digital for all small firms. It’s on corporation tax, and umbrella companies, that the wooing of contractors unfortunately stopped.
But today, contractors and other business owners who’ve registered with Companies House can expect to pay at least the 20% base rate for the foreseeable future. Like the off-payroll rules not being positioned to move, this is something PSCs can be relatively pleased about.
Non-doms
Pre-election, the Tories seized upon ex-Labour leader Ed Miliband’s plan to eliminate non-domiciles from complex relief schemes. Non-doms, as they’re known, are classified as workers who have an ancestral home -- usually that of their parent -- outside Great Britain.
They may earn in this country but, providing they don’t spend or bank in the UK system, they benefit from the potentially lower tax bands of their ‘home’ nation. By scrapping the status entirely, the government was expecting to gain around £1.4bn in revenue.
Non-doms can, therefore, breathe a sigh of relief, because this is another policy that’s been shelved. We say ‘another’ because a total of 11 plans were dropped by Mrs May’s government at the Queen’s Speech. So, for example, there’ll be no winter fuel payments raid; no ‘dementia tax,’ and no energy price cap (another of Mr Miliband’s ideas).
Final thought
No one can contest that we’re in a very strange period at present. Heavily taxed and regulated buy-to-let investors will tell you that, having seen the housing stock they purchase cut in half in the last year. First-time property buyers, normally under the cosh, will concur too. Because unexpectedly, they’re the ones who are now driving house-purchase activity!
Just a snapshot perhaps, but it’s reflective of the very different circumstances that are upon us, in only a very short amount of time. This turnaround in fortunes for two types of taxpayer that contractors could be either of underlines how keeping informed, and well-advised, is paramount, particularly when the only real certainty is uncertainty.