Taxing times for PSCs persist, despite April's lull
But looking comparatively at the dawn of the 2018/19 tax year, the pace of change seems to be slowing, especially when it comes to measures directly targeted at contractors from this month onwards.
Precisely why this apparent change might be happening deserves scrutiny, as do the steps that shrewd contractors might want to take in response to the smaller yet still significant tax revisions post-April 6th, writes the ACCA’s senior tax and business law manager Jason Piper.
Well, there are actually plenty of possible reasons for the slowdown this year. Firstly, Brexit is the nearest it’s ever been to considerations about government and the business environment and so, at the moment, the bandwidth available for anything but preparing for withdrawal from the EU is very limited.
HMRC has the additional issue that it was already trying to manage 15 major programmes and 250 projects as part of its wider Making Tax Digital agenda, before this tax year came along.
Its chief executive Jon Thompson has openly acknowledged the challenges that such a hefty workload poses. He’s overseeing no less than ‘the biggest organisational change programme in Europe’ as he recently described it. It's a feat that even the hardest-nosed Change Consultants would probably be sympathetic to Mr Thompson for facing! Little wonder, then, that HMRC is in discussion with government over 'reprioritising its portfolio of work.'
While that might account for some of HMRC’s let-up this tax year, a look at the specifics of the tax authority’s approach to PSCs and employed/self-employed issues, should provide a bit more of an explanation.
Specifically; is the flood of PSC-targeted measures reducing to a trickle because HMRC feels they’ve finally got a handle on the issues of incorporated businesses? In response, many will yell ‘No,’ arguing that that this seemingly quieter new tax year for PSCs is just a temporary lull while HMRC waits for the recent IR35 measures to bed-in; before it assesses their effectiveness and possibly revisits (or revamps) the entire area of ‘disguised employment.’
In truth, and in light of my experience as an IR35 Forum member, I’d say that there’s probably a blend of all three factors at play -- Brexit, HMRC/MTD, a pause in the Revenue's ‘PSC agenda.’
Sadly though for hard-working PSCs, the ‘pause’ is likely the least important, seminal and symbolic. About the only bit where HMRC would probably feel they’ve finally settled the position is the contractor loan schemes.
In this area, between the GAAR, the DRL charge and CRS, they’d hope to finally have everything pinned down. For you not get pinned down by HMRC, you should read about the steps you need to take if you’ve ever taken advantage of a contractor loan scheme. And get reading sharpish if you have, as your timetable is tight to get the wheels in motion if you want to avoid any additional penalties or aggravation.
Elsewhere and on the PSC agenda, the tax treatment in answer to the small business/self-employed/IR35 equation is still up for discussion.
Furthermore, despite the guise of fewer changes to align with if you’re a PSC from April 6th 2018, remember there’s a wide range of consultations underway which may see the relative rates of tax, and how they’re applied, change yet again. If you’ve got the time (after all, it's a quieter tax-year start), you can respond to the reviews/consultations on:
- Employment Status
- Tax Avoidance Involving Profit Fragmentation
- Online platforms ensuring user tax compliance
- VAT registration threshold
And with the Taylor Review’s “vast changes” to independent work being waved through, some might say that the tax noise is as loud as it ever was. It’s perhaps just that it has shifted away from emanating only from the starting pistol of a new tax year in April. At least, for 2018/19 it has.
Nonetheless, let’s look at those changes. What are the features that are set in place for this year, and which you can definitely plan for?
Starting first with Income Tax, there are several thresholds for the 2018/19 tax year that you need to be aware of. Breach any and you’ll pay more tax:
- Higher rate income tax band. Income between £46,351 and £150,000 is taxed at 40%.
- Additional rate income tax band. Anything over £150,000 is taxed at 45%.
- Personal allowance reduction threshold where the personal allowance of £11,850 is reduced by £1 for every £2 above £100,000.
- High income child benefit charge threshold which means that child benefit begins to be clawed back once income exceeds £50,000.
Note, however, that if you live in Scotland, or spend more days in Scotland than elsewhere in the UK (for example, if you work offshore on North Sea platforms), you will be subject to different Scottish rates and thresholds. The Scottish rates apply to your salary and pension, but your savings and dividend income are subject to UK rates and thresholds.
Reduced dividend allowance
If you receive dividends above £2,000, your dividend income may be hit with a higher rate of tax, as follows:
- If your salary income does not fully use up your personal allowance, dividend income falling within the personal allowance is tax-free
- Dividends in the basic income tax band are taxed at 7.5%
- Dividends in the higher rate income tax band are taxed at 32.5%
- Dividends in the additional rate income tax band are taxed at 38.1%.
This reduction in the dividend allowance means that, compared to 2017/18, basic rate taxpayers would be £225 worse off (7.5% x £3,000). This increases to £975 for higher-rate taxpayers and £1,143 for additional-rate taxpayers.
So, bearing these thresholds in mind, there are some legitimate tax planning options you can consider exploring to avoid a swingeing tax bill including:
- Making pension contributions for yourself and your family;
- Transferring shares or bonds to your spouse to make the most of the dividend nil-band and savings allowance;
- Switching your investments into tax-efficient investment schemes; and;
- Making sure you claim Gift Aid relief on any qualifying donations to charity.
And finally, if you really do think there’s nothing incoming for you this tax year, remember that if your business is VAT-registered, there is the mandatory rollout of digital record-keeping and return submission from April 2019.
You’ll almost certainly need to make some changes to your record-keeping processes, and it makes sense to be ready from your next year-end. Unfortunately, the HMRC trials of compatible software (there’ll be no filing direct from the Revenue website) are only just starting, and the lists of suppliers are still sparse. But keep checking back, and ask your accountant about it. Want to get even more involved to liven up this supposedly non-eventful tax year beginning?! Then by all means -- take part in the VAT-related MTD pilot by contacting HMRC at: email@example.com.
All this from a supposedly quieter than usual tax year commencement. They'll certainly be a few PSC owners -- and their advisers -- who probably won't mind too much.