Budget 2021: Contractors with just one major client face 'big, unwelcome shock'
Infuriating contractors on social media at the weekend, the plan was mooted to be a new tax band which Rishi Sunak will impose on limited companies that have a sole, “clear” customer.
Outlined anonymously to the inewspaper and characterised only as a ‘suggestion,’ the plan could see Mr Sunak hike the corporation tax that such owner-managers pay from 19 to 21%.
'Would be big, unwelcome, deeply unpopular'
Contractor accountant Joanne Harris says that, if it is unveiled by the chancellor on Wednesday, the ‘one-major-client-tax’ would represent a “big, unwelcome shock” to PSCs.
“Increasing the tax bills of hard-pressed limited company owners would be a deeply unpopular move, especially if ‘one end-user’ was the sole criteria,” she told ContractorUK.
Technical commercial manager at SJD Accountancy, Harris added: “Not only does the plan risk deterring start-ups, but it also turns the screws on PSCs already facing IR35 reform.”
A similar idea was once floated in Australia, where the ‘80-20’ rule would have denied business tax treatment to firms deriving 80%-plus of their income from a single source.
But the idea was snuffed out, as was a similar proposal in the UK on the eve of Autumn Statement 2015, aimed at banning PSCs from contracting for one organisation indefinitely.
'Timing seems all wrong'
Orange Genie’s operation director Helen Christopher does not think that now is the right time to introduce such blunt, revenue-raising measures.
“I understand the need for tax increases and expect that the government will make reference to them on Wednesday, but the timing seems all wrong to me.
“We’ll still be in lockdown on Budget day, and all the wording of the prime minister’s roadmap out of lockdown suggests this will be a long and slow process.”
She added: “So yes there’s a need to restart the economy and get covid’s economic recovery underway, but it’s hard to see the government being brave enough to increase taxes right now.”
'Lots of tax announcements on the 23rd'
Yet the details of the ‘one-major-client-tax’ may not be released now, hints IR35 expert Kate Cottrell who observes that “lots of tax announcements” are due post-Budget on March 23rd.
In fact, for the first time this year, the government will unveil a range of “important but less high-profile” measures “separately from the Budget,” according to Treasury minister Jesse Norman.
“The goal of making these announcements… still all on a single day…[is to provide] greater visibility among, and opportunity for scrutiny by, parliamentary colleagues, tax professionals and other stakeholders,” the minister has said in a letter. “It will thus be, I hope, a small but potentially useful reform.”
'HMRC to press on with IR35 reform, no further debate'
“Perhaps a more important date for the diary regarding future tax reform [than March 3rd] is March 23rd -- dubbed ‘tax day’ -- when the government will unveil plans for longer term tax policy changes,” reflects Brookson Legal’s Matt Fryer.
“[But] it is unlikely that IR35 will be mentioned…[in the Budget on Wednesday other than to wave it through]. Government is now keen to press on with these changes to the off-payroll working rules and avoid further debate.”
Potentially giving the impression that there is something to hide (or unveil under the cover of a non-Budget day), HMRC recently refused to upload a broadcast it ran on how the rules governing PSCs will change in the future.
“On this occasion HMRC wouldn’t allow us to record it,” said IPSE, explaining to members this month why a ‘Put your IR35 questions to HMRC’ webinar could not be shared online.
'There should be another delay to the off-payroll rules'
Since then, the contractor group has submitted to the Revenue that the April 6th 2021 off-payroll framework should be delayed, to avoid “seriously damaging” the flexible workforce.
The appeal to defer has also been sounded by 44 per cent of contractors, shows a poll of 500 “self-employed” workers quizzed ahead of this week’s Budget by ‘Big Four’ accountant EY.
The Institute of Directors agrees postponement would be best. “There should be another delay to the regulation until next year,” the institute says in its Budget submission. “[Or] at least [a year] -- so the challenges are better understood and mitigated.”
Delaying IR35 reform while extending covid-19 support measures like the furlough scheme would give entrepreneurs a much-needed “shot in the arm,” the IoD added.
'Keeping the 19% rate would be a start'
But SJD’s Ms Harris believes the boost that businesses really need is to their bottom-lines.
“Corporation tax is a likely target for increases at Budget 2021, but I urge HM Treasury to ensure that any increases don’t adversely impact really small businesses,” she said, adding:
“It is probably too much to hope for a cut in corporation tax for this group, despite one press report talking of a return for the Small Company Rate. But keeping the current rate at 19% would be a start, as many directors are still fighting just to survive the tough covid economy.”
Speaking while aware of the mooted ‘one-major-client tax’ plan, Ms Harris suggested both could be announced simultaneously at the Budget -- a tax cut for SMEs and a clampdown on non-bonafide businesses.
Declining to be named, another contractor accountant said of the latter: “I fail to see how HMRC could enforce this higher tax band for sole-client PSCs. Much more achievable would be a measure tied to turnover.”
'Nuts, crackers, and not forgotten'
Taking to LinkedIn to denounce the mooted one-client tax measure, inniAccounts’ James Poyser said taxing an incorporated business more heavily on the basis of it not having two or more customers was “nuts.”
“It's hard enough to figure out IR35 status, and to introduce more rules to find a subset of limited company owners is crackers.”
Boss at off-payroll.org, he continued: “[So if you’re] safely outside IR35, don’t worry. Rishi hasn’t forgotten you. He's [apparently] going to tax you more.”
Tax lawyer Rebecca Seeley Harris is hoping the government will use Budget 2021 to adopt DISS, so she will likely be disappointed at the prospect of further pain for PSCs.
“The chancellor is considering raising taxes for the self-employed…which I believe will have a devasting impact on the sector,” the founder of ReLegal Consulting says.
“Not to mention that between three and four million [individuals] have been excluded from government support during covid – [workers] now expected to pay for the support schemes.”
'Dramatic tax rises'
“Who knows,” Qdos CEO Seb Maley asked about this week’s Budget in an online post, “perhaps [we might] even [get] tailored support for the three million excluded?
“[And] Sunak might even resist any dramatic tax rises -- in keeping with the Conservative party manifesto -- to stimulate the economy.”
Forgotten Ltd sounds hopeful. Asking PSCs to fill out a questionnaire on their experience of the pandemic, the group said:
“Corporation tax increases is one of the things we are strongly campaigning against.
Pointing to comments by Labour leader Sir Keir Starmer, it added: “It seems we are not the only ones who feel taxing those who have received little or no help is not a wise move.”
'Stability now required'
Also unwise would be if the chancellor used Wednesday’s Budget to add to the reams of rules around the contractor industry, says compliance expert Crawford Temple.
Thereby implying he too would be against a new tax on sole-customer suppliers, the CEO of Professional Passport also said: “I would urge him [Rishi Sunak] to restrain from introducing any further changes to legislation to our industry.
“Significant year-on-year changes have had enormous impact on the sector for many years, and a period of stability is now required.”
Such a hands-off approach by Mr Sunak would include HM Treasury ‘leaving incentives for businesses alone,’ added Mr Temple, such as not altering Entrepreneurs’ Relief, he exampled.
'We're back to where we were on Entrepreneurs' Relief'
Ahead of her exclusive guidance for ContractorUK readers on Budget 2021 potentially hitting the ER regime to make closing a company more taxing, WTT Legal’s Leila Ghazzali explained:
“The narrative ahead of the Budget suggests we’re back to where we were last year.
“Only this time, entrepreneurs are not only concerned with Entrepreneurs’ Relief -- Business Asset Disposal Relief -- being scrapped, but with the entire Capital Gains Tax system due to be reformed [too]”.
Appealing to the chancellor directly, the Recruitment & Employment Confederation’s CEO Neil Carberry said: “Businesses all over the UK will be looking to…[the] Budget as an opportunity for the government to match economic action to pandemic ambition.
“That includes cashflow support -- like extending the terms of the VAT deferral and maintaining furlough -- but also action to boost the recovery, like cuts in employer National Insurance and reforms to the Apprenticeship Levy.”
'Sunak should help umbrella companies remain viable'
But it also includes the government adopting a “temporary furlough scheme” to remove the financial burden including from NI, that umbrellas using the CJRS currently face, says the FCSA.
Phil Pluck, the Freelancer & Contractor Services Association’s chief executive reasoned: “While this would still impose a cost on our member companies, it would allow them to continue to support employees, remain financially viable, and be better prepared to support the UK economy as it emerges out of the pandemic.”
Mr Temple’s Professional Passport, which works with umbrellas, added: “Businesses, and their owners, have been hit hard by the pandemic and have proved their worth and resilience.
“Eroding incentives further, following the previous changes to dividend taxation, is not the right message to send to this audience”.
'Fintech-friendly package possible on Wednesday'
To incentivise businesses towards the UK as the dust on the Brexit deal settles, the chancellor could use Budget 2021 to update how he plans to make Britain more ‘Fintech-friendly.’
So funding for new Fintech ‘hubs’ and visas might be outlined on Wednesday, following a review in July which HM Treasury confirmed to ContractorUK is still set to report before the end of March 2021.
However despite being asked, twice, the department ducked how (if at all) financial contractors could contribute to the review, such as by emailing their ideas or comments to the review team.
Similarly, the contractor accountant who declined to be named said that, quite apart from the ‘one-major-client tax measure,’ there will be further disappointment for those who think the April 6th reforms to IR35 have been overlooked by HMT too.
“As much as I would like to see a further deferral,” he began, “the government has repeatedly confirmed that the reforms to off-payroll working -- the IR35 reforms, will go ahead. Those hoping for a last-minute reprieve will be disappointed.”
Meanwhile, it did not identify the ‘one major client’ PSC tax plan, yet a pre-Budget 2021 advisory by accounting firm BKL cautioning what’s definitely in store from the chancellor might as well be referring to it, stating: “The rumoured changes to Capital Gains Tax, extensions to coronavirus support schemes -- and the unexpected.”