Budget 2021: What PSCs need to know with Sunak’s sights set on Capital Gains Tax
Following the devastating impact of the covid-19 pandemic, chancellor Rishi Sunak is tomorrow tasked with setting out an economic roadmap for the recovery of the UK economy at his Budget 2021.
With the prime minister’s lockdown-leaving roadmap depending on four key targets, it’s likely Mr Sunak will also need a staggered approach, and almost certainly that spells an increase in tax rates.
At this 11th hour, speculation is still rife that the Capital Gains Tax regime will be targeted by the chancellor, echoing a similar narrative that preceded last year’s Spring Budget – much to the frustration of contractors who run their own limited company, writes Leila Ghazzali of WTT Legal.
Only this time around, such entrepreneurs are not only concerned with Entrepreneurs’ Relief (now known as Business Asset Disposal Relief - BADR), being potentially scrapped, but also with the possibility of a complete overhaul of the entire CGT system. So it’s the prospect of a double-blow to limited company contractors -- on March 3rd, but also for a while to come, given both revisions would have long-lasting effects.
Last year, the chancellor called the Office of Tax Simplification to review the effectiveness of Capital Gains Tax. At the time, the OTS was directed to simplify the CGT tax regime, but there is now a desperate need to ‘fix’ the economy, due to all that has been fiscally endured since then. As the government has pledged to not increase income tax, VAT or national insurance contributions, CGT is a clearly in the Treasury’s sights.
Refresher - what is CGT?
In its simplest terms, CGT is chargeable when an individual disposes of an asset and the sale produces a gain – i.e. the sale proceeds less the original cost.
The rate charged on the gain is either 10% or 20% for non-property assets and 18% or 28% for residential property, depending on the extent of the gain and the amount of taxable revenue earned by the individual.
Individuals also have a CGT annual allowance of £12,300 a year. Capital gains can also be reduced by deducting capital losses that may occur when the asset is sold for less than the original purchase price or by benefiting from reliefs that may be available.
In comparison to income tax, the normal CGT rates are seen to be more generous -- CGT’s higher rates are 28% and 20% for residential homes and for other chargeable assets respectively, whereas the higher income tax rate is 40% and the additional rate 45%. Tomorrow’s Budget 2021 could potentially see the chancellor use the excuse of bringing CGT into alignment with income tax, as a sensible-sounding way to rake in more revenue.
Business-owners and BADR
The CGT regime currently offers generous reliefs for business owners, such as BADR. In the past few months this has prompted business-owners to review their options and consider their exit strategy.
Now, with only hours rather days remaining before the Budget, company directors should be on-watch for how any changes will affect their (hopefully by now) shortlisted options. Should the chancellor see fit to ensure that anti-forestalling provisions are included in his Red Book and applied to the changes, it is unfortunately possible that business-owners may have missed the boat, meaning they could be too late to take advantage of the current CGT rates (including BADR).
Additionally, contractors who have their own Personal Service Company (PSC) and have been compelled to change their working practices due to private sector IR35 reform on April 6th may need to consider their alternatives too.
The IR35 reform effect
This consideration is necessary because the implementation of the reforms has resulted in end-users ‘blanket’ banning the future engagement of PSCs, to mitigate any risk of being caught by the incoming off-payroll rules. Therefore, more contractors are looking at the idea of full-time employment, by working through an umbrella company, moving to PAYE as the end-client’s employee, or via their agency’s payroll. The upshot of all of these routes? Their PSC may no longer be necessary.
However disposing of a company is not a decision that should be taken lightly, as once it has been liquidated, it is very difficult to reverse. Individuals should also take care not to be caught by the ‘anti-phoenix’ provisions, which are effectively targeted anti-avoidance rules to prevent a tax advantage arising when a company is dissolved, but then carries on a similar trade.
Refresher – Members Voluntary Liquidation (MVL)
If a PSC is no longer needed because it has reached the end of its purpose, but is still solvent, then an MVL may be considered. It is a formal process to bring a solvency company to a close.
To qualify for an MVL, the PSC must have more than £25,000 ‘cash’ in the company. It also must be able to pay all creditors including HMRC.
An MVL allows for the extraction of the assets as capital rather than income making it subject to CGT, rather than the higher income tax rate, depending on whether or not the relevant requirements are met. In some instances, BADR will be available, serving to reduce the tax liability significantly.
All eyes on the Red Book
With the Budget looming large, and IR35 reform just a few short weeks away, PSC contractors might still be working out exactly where their next role is going to be, and via what structure they will execute it. This is especially likely in the current climate, as like other workers contractors have been experiencing difficulty in finding opportunities and may feel they have no alternative but to change the way they work. To prevent being forced into a position (some end-users have set a ‘decision-day’ of March 31st), it is crucial that contractors maximise their working prospects and consider all their options.
One consideration would be to decide whether the PSC is still going to serve a purpose, factoring-in what the chancellor announces tomorrow regarding CGT and BADR. Becoming a permanent employee or accepting a role on PAYE basis would mean, to some, that their PSC is no longer needed. To others, and taken with only a vague intention by Mr Sunak to move against BADR, it might mean dormancy.
Of course, we are yet to learn of the precise changes, if any, in the Red Book affecting closing a company, but it should be borne in mind that determining the tax position of winding-up is just one (albeit important) consideration. Similarly, if the adverse changes to CGT and ER/BADR on the chancellor’s lips tomorrow are only small, disposing a PSC may still look attractive, simply for allowing contractors with regulatory-fatigue to finally draw a line under potentially long-running administrative and/or financial burdens.
Making your PSC work
Alternatively, for the resolute, retaining a PSC and providing the end-client with services on a genuine consultancy basis under a Statement of Work is worthy of exploration. When executed correctly, this option can remove the responsibility of determining the IR35 status from the end-client, provided that the service is genuinely outsourced. This is therefore more attractive to end-users. However, it is essential to consider whether the criteria are met for providing a truly outsourced service based upon agreed deliverables with payment on a fixed price basis upon meeting specific milestones. And so we strongly recommend seeking professional advice in this area.
Elsewhere in the market, contractors may be providing services to the end-client via their PSC but if the end-client has determined the engagement as inside IR35, or will do in early April, such contractors may want to exercise their right under the April 6th legislation to disagree. Going through the ‘status disagreement process’ at more than one client seems prudent and proportionate before arriving at a firm decision about the fate of your PSC.
The final pieces of your work jigsaw are almost in sight
At this stage, and potentially even after the chancellor has sat down tomorrow, there are many options for contractors to consider in the next few weeks relating to how they will operate, and when their current operation might need to change, or even close down.
Our stance is that tomorrow's Budget 2021 and if not, at the very latest, March 23rd -- ‘tax day,’ will hopefully provide some certainty, which contractors need to be fully informed about their options. As always, there will be an abundance of industry guides and government materials on the Budget and reviewing these, ideally with an adviser who has an unabridged view of your financials, is the only certain way to keep the uncertainty as to how you will operate to a minimum.