What a brolly boss makes of Budget 2018
Not for the first time in most contractors’ memories, the need for a “fair” tax system was trotted out by the chancellor on Monday, so it's now almost become a staple of government Budgets, writes Lucy Smith of Dolan Accountancy and Contractor Umbrella.
Well, the personal tax free allowance was increased to £12,500 and the higher earnings threshold hiked to £50,000. While both of these may find it more difficult to meet the other tenant of the tax system the Tories said on Monday they want, ‘sustainable,’ I can’t see too many people complaining about these two increases. And by ‘people,’ I mean some 32 million voters. So quite a shrewd political move by Philip Hammond. But self-described ‘Spreadsheet Phil’ also gave us something that was trailed in the Budget’s run-up as even more inevitable -- the reform of IR35 in the private sector.
In fact, section 3.8 of the Red Book details the government’s aim to bring private sector organisations in line with organisations (and agencies) in the public sector. Put like that, the non-contractor-sector voter might not see what all the fuss is about. But in practical terms, it pushes the responsibility onto the organisation, agencies or other third parties engaging the workers to decide, and be responsible for, the applicability of notoriously opaque IR35. Quite positively -- according to many on Budget day and quite a few still today, the impact will not be felt on smaller organisations; normally defined by a figure of 100 employees, as HM Treasury announced an exemption for ‘small businesses.’
This wasn’t the only small but significant turn of events. There was not a single word about ‘pensions tax relief’ (despite the reams written in the mainstream press to expect a clampdown). On the plus side of pensions, the lifetime allowance was announced as increasing to £1,055,000. So contractors, if you’re looking for any kind of tax saving via PAYE, then salary sacrifice pensions may be the way forward.
Hardly covered by the contractor press since Budget day is the announcement at section 3.75 of the Red Book. Interestingly, it states that the fallout from Brexit may yet have an impact on UK tax legislation, with “minor amendments” likely. Only time will tell if that is likely to change the government’s stance on the valuable ‘gig’ economy.
And it should go without saying, but these minor amendments seem most unlikely to disturb IR35 reform. We have already seen the outcry across social media to try and stop the reform before April 2020. But -- and this is crucial, if we look back at the contractor sector’s previous reform -- the introduction of the T&S rules in April 2016, once the government is in full flow, aims to stop the reform seem futile.
Time may be better spent looking at how the government can stop any basket approaches to the reform. At the end of the day, they want a “fair and sustainable tax system” (as mentioned at the outset), so this has to work both ways. Penalties for IR35 ‘blanketing’ may be the way forward.
Regardless, agencies and end-clients need to start their preparations now, whether that is reviewing who will ensure that CEST tests are performed effectively, how deductions for tax and NI will be made if necessary, and maybe considering payroll bureau for support and substantial ‘due diligence’ on any umbrella companies they may choose to work with.
Unfortunately, it is expected that there will be a rise in non-compliant brollies, leaving agencies and end-clients at HMRC risk. So contractors, make sure you know your brolly, invest time in that relationship and understand exactly how they operate.
In further attempts to tackle ongoing tax avoidance (following Royal Assent of the Finance Bill 2019/20), directors and other persons involved in tax avoidance, evasion and interestingly ‘phoenixism’ will be held jointly liable where there is a risk that the company may deliberately become insolvent. And an updated offshore tax compliance strategy will be published by HMRC, showing the progress made and the non-compliance since the previous strategy was published in 2014.
Standing back from the nitty gritty, we once again have a Budget that did pretty much what officialdom strongly suggested it would -- especially with regard to IR35 reform. Is it all ‘doom and gloom’ for contractors, as a ContractorUK Forum thread suggests? No, not if the delay until April 2020 allows the reform to be implemented correctly. The question is do we spend the time battling against something which is unlikely to be changed, or do we work with them to make sure that it is implemented in a way that works the way the legislation was intended, leading to a recognised split between disguised employees and true, niche skill-set, contractors?