Experts clash over Spring Statement 2019 omitting IR35

A reprieve on Making Tax Digital; a call to stop micro-employers abusing R&D relief and thirdly, a much bigger haul for HMRC from self-assessment and contractors' dividends.

These three 'under-the-radar' developments from yesterday’s low-key Spring Statement last night drew experts’ interest. More so, in the eyes of some of them, than IR35's ‘no-show.’

But in terms of relevance to the contractor sector, this trio still rank below IR35’s omission, because it implies to many that its reform in the private sector from April 2020 is now set.

'No clarity'

Financial advisory Contractor Wealth is among the advisers to contractors unimpressed by IR35 being absent, even though all are aware that Philip Hammond was always likely to be preoccupied by Brexit.

“There were no further announcements on IR35 and how this is going to play out,” the advisory’s senior financial planner Duncan Craze told ContractorUK.

“[So the under-pressure chancellor] has not given any more clarity on the future role of contractors and the valuable service they provide to the private sector.”

Fortunately for the IFA’s clients, the personal allowance is increasing to £12,500 from April; the higher rate threshold to £50,000, and the capital gains tax threshold to £12,000.

But similar to IR35, Loan Charge 2019 will be seen by contractors as the other big Treasury tax grab that the chancellor left in the pipeline yesterday. Unlike IR35 however, it was mentioned.

'Seven-year payment arrangement'

On top of officials citing its April 5th start date, the OBR included the charge in its rundown of measures unveiled since October, to confirm the support for low-to-mid-income earners.

“[An HMRC] extension of time limit...introduces a seven-year payment arrangement for individual users of disguised remuneration schemes with current incomes below £30,000.”

The OBR added that, thanks to measures like the reduction in the dividend allowance to £2,000, self-assessment income tax receipts will leap by 7.9 per cent in 2019-20.

In more eye-watering terms, the OBR says that self-assessment taxes are set to surge from £28.3billion (for the 2017/18 tax year), to just over £40billion by 2023/24. It further forecasts a 0.2 per cent of GDP rise in interest and dividend tax receipts.

'Deal-Dividend'

It is the tax payable in such a context which stands to affect contractors much more than the chancellor’s catchy-sounding “deal dividend,” trumpeted in his Spring Statement speech.

This ‘dividend’ is simply an “economic boost” if the UK has an “orderly” EU exit, in which case a Spending Review would be held this summer so Mr Hammond can decide how to ‘distribute’ it.

Also in his speech, and relating to Brexit implications for contractors who work overseas, the chancellor said: “We cannot regulate how the EU will operate its border in a no-deal exit.”

'Completely exempt'

But to try to give certainty on how the UK will operate its border -- an issue raised by staffing body the REC concerned about IT skills shortages, Mr Hammond said:

“From this Autumn, we will completely exempt PhD-level roles from the visa caps.”

The Institute of Directors said: “Businesses will welcome the announcement to exempt doctoral-level roles [such as scientists and researchers] from visa caps.

“It represents a small step forward in unleashing R&D activity at a time when wide skills gaps are emerging across the country.”  

'Genuine companies with very few staff'

But the enterprise lobbyist is not alone in considering R&D. The government says it will soon consult on how to prevent abuse of R&D tax relief, as it promised at Budget 2018.

“The amount of payable credit that a qualifying loss-making business can receive through R&D relief in any one year will be capped at three times the company’s total PAYE and NICs liability for that year,” points out Kingston Smith.

Yet the chartered accountancy firm also cautioned: “This measure was intended to tackle fraudulent R&D claims by sham companies, but could feasibly apply to genuine companies with very few employees.”

More positively for such smaller outfits, the government will bring into “sharper focus” big businesses that “put the squeeze on their suppliers by paying them late,” said the firm’s head of tax Tim Stovold.

In particular, the chancellor announced that the audit committees of listed companies will be required to report on their payment practices, as the Federation of Small Businesses recommended to him.

'Contend with MTD'

But the FSB is less enthused that, like IR35 and the Loan Charge, Spring Statement 2019 signals that Making Tax Digital is still going ahead without delay, representing a burden that ‘firms will have to contend with’ -- in as soon as about a fortnight’s time.

The government announcing yesterday that MTD will not be extended to other taxes or businesses in 2020 (meaning in its earliest extension will be until at least April 2021), was endorsed by the federation however.

“Extending the freeze on further roll-out of MTD from 2020 to 2021 is a welcome move,” said FSB chairman Mike Cherry.

“The government should now rule out extension of MTD to firms below the VAT threshold until the end of this parliament at the earliest, in 2022. A full review of the roll-out will be needed in the months ahead.”

'Delivers on a promise'

The Chartered Institute of Taxation is also pleased at the extra breathing space. “In practice, MTD will not be further extended until at least April 2021, either to bring income tax within the scope of MTD, or businesses who are voluntarily registered for VAT,” it said.

The CIOT’s Adrian Rudd added: “This delivers on the tax minister’s promise that the government will not widen the scope of MTD beyond VAT before the system has been shown to work well.”

Meanwhile, to deliver for the hi-tech sector, the chancellor used Spring Statement 2019 to sign-off a “substantial investment package,” commended Studio Graphene, a digital design firm, and Foundtech.ai, an AI app-maker.

'Democratising digital'

The duo was referring to £79m from Mr Hammond for ‘ARCHER2,’ a new supercomputer to be hosted at Edinburgh University, £45m for genomics research and £81m to develop new types of lasers.

The firms added: “The chancellor [also] reiterated his commitment to democratising the digital marketplace so that organisations of all sizes are able to compete on a level playing field, with the Digital Competition Expert Panel releasing the findings of its review”.

Further announcements at Spring Statement 2019 affecting the UK IT industry and/or the technology/digital sector, include –

  • The launch of a strategy for delivering a nationwide full fibre broadband network by 2033.
  • The all-clear for the Competition and Markets Authority to undertake a market study of the digital advertising market.
  • New proposals to require an increased proportion of green gas in the national grid, to advance decarbonisation of the UK’s mains gas supply.
  • Bringing forward Budget 2018’s £700m package of Apprenticeship Levy modifications (the co-investment rate will be halved from 10% to 5%, and the amount employers can transfer to their supply chains will increase to 25%), with a view to helping more firms take on apprentices.
  • A recommitment to refocus on technical skills in education, thanks to the ‘T-level’ system being on track to deliver its first three routes from 2020.
  • The consultation and introduction in April 2020 of the Digital Services Tax.
  • A call on the government to establish a new Digital Authority to oversee the regulation of digital service providers and internet companies (sounded alongside the Spring Statement, by the House of Lords).

'No further IR35 scrutiny'

An accountancy firm for contractors in the IT sector, Nixon Williams, said this morning that, at odds with those criticising Spring Statement for omitting IR35, it is glad that the probing is over.

“Following the launch of a new HMRC consultation last week around reforming IR35 in the private sector,” the firm says, “we welcome the fact that there will be no further scrutiny of the UK’s contracting workforce and the way these companies are taxed”.

But Helen Christopher, operations director at Orange Genie, indicated that there needs to be more scrutiny, if the Revenue is to ever learn about how contracting operates in order to get its approach to reform right.

“HMRC recognise [in their consultation] that they don’t fully understand ‘how labour supply chains in the private sector are typically structured,’” she said.

“So quite how the Revenue’s proposal on liabilities moving along the supply chain -- and sitting with any party that does not fulfil their obligations, will be monitored and managed; we are still none the wiser.”

'Disappointed'

Derek Leith, a global tax leader at EY reminded that the off-payroll consultation closes in May. But he believes IR35 not featuring at Spring Statement is going to be less of a relief, more of a regret.

He said: “[The IR35 consultation] runs alongside a broader consultation on the determination of employment status which closes in June. Employers will be disappointed that the chancellor didn’t see fit to comment on either of these matters.”

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