Autumn Budget 2021: key areas affecting contractors: demystified
However the chancellor did unveil new HMRC measures, including against avoidance promoters, potentially affecting loan charge contractors. See section three.
Further HMRC measures, plus Budget implications for limited companies, other contract IT workers and hirers are outlined below too, in sections four, five, six and seven.
ContractorUK has commissioned a personal finance expert to cover the chancellor’s personal finance announcements separately, here, and a mortgage brokerage boss to cover its home-loan related announcements, here.
1/Off-Payroll Working in the Private Sector – no change
IR35’s failure to appear at Autumn Budget 2021 is actually ‘a good thing.’
Or at least, so a growing number of advisers to contractors appear to be suggesting.
Because, while there was never a proposal to remove the small company exemption, there was a never a promise by the government not to either.
“You could say that small businesses remaining exempt from the changes is a bonus,” Qdos told ContractorUK last night.
‘Somewhat of a relief’
The status advisory was referring to the carve-out in the April 2021 off-payroll rules for companies considered ‘small,’ with the effect that such companies are exempt from the rules and therefore are precluded from deciding the IR35 status of contractors they engage.
“It is somewhat of a relief that no further major tax changes were announced affecting PSCs,” the firm’s operations director Helen Christopher said of Rishi Sunak’s Red Book measures.
“After all, PSCs have already been hit with the September 2021 announcement of the social care levy, and potentially hit by a previously announced hike to corporation tax from 2023.
“So contractors may feel like there’s not a lot for them in this Budget -- aside from a reduction in alcohol duty and fuel duty. But equally they can be relieved to have been left alone a bit this time round.”
‘Limited company contractors are cheaper’
Martyn Valentine, a director at The Law Place goes even further than the ‘no news is good news’ verdict.
“Enough of the despondency,” he wrote, “the increase in National Insurance Contributions means [outside IR35] limited company contractors are cheaper [for clients to hire] than before.”
Fleshing out his argument online, Mr Valentine said the 1.25% increase could even “possibly [sound the] death-knell for unscrupulous umbrella companies who pass on ‘employment costs’ to contractors.”
‘Government has left contractors collared by IR35’
But one umbrella company known to be vocal against the unscrupulous doesn’t think ‘upside’ and ‘off-payroll rules’ go together at all, even if her outfit is (on paper) a beneficiary.
Clarity Umbrella’s Lucy Smith explained: “The government has left some contractors collared by the revised IR35 legislation when these contractors probably should not have been affected by it at all due to end-client ‘blanket determinations.’
“But then the government isn’t prepared to step up to the mark and protect these individuals from companies that could leave them at risk of further issues; fines and taxes.
“Government is just leaving it down to continued self-regulation, which has received much criticism in the last few months. Some support and backing is surely not too much to ask?”
‘Producing enough tax juice with ease’
Yet thinking the government is thinking of trying to help UK contracting, or will even respond to sector-specific concerns, is to give it too much credit.
“I think the government is pleasantly ignoring the sector,” explains DNS Associates director Sumit Agarwal. “[Thanks to IR35 reform], the sector is producing enough tax juice with ease.
“Government isn’t keen to support PSCs in relation to IR35, or clarify the few muddy areas. Instead, the government is focusing on areas to generate votes; like the NHS and Transport.”
Perhaps former IT contractor Paul Mayhew, now an expert on wealth management who today writes exclusively for ContractorUK on the Budget’s pension measures, summed it up best.
“At a time of unprecedented public borrowing for the UK, it’s not surprising that no changes or reliefs were offered by the chancellor in the [only very recently legislated for] IR35 arena.”
2/Umbrella company regulation -- the Single Enforcement Body was a no-show
“Disappointing”, says Parasol.
“A missed opportunity”, says Compass Contracting.
“Soul-destroying,” says Clarity.
All three umbrella companies were referring to Autumn Budget 2021 making no mention of regulating umbrella companies.
The omission is even though a freshly released HMRC guidance paper on how to avoid underhand umbrella companies was widely seen as a precursor to new regulation.
It’s also even though a policy-plan to regulate umbrellas has been sent to HMT, following the disclosure of holiday pay pocketing, ‘fitted kitchen’ kickbacks and “downright theft.”
And it’s even though the government has committed to a Single Enforcement Body, informally known as the Workers’ Watchdog, to police brollies (among other activities).
‘Lot of behind-the-scenes calls’
Last night, a key supporter of umbrella regulation involved with talks with officials admitted he “simply doesn’t know why” funding for the SEB was not addressed in yesterday’s Budget.
Two other supporters also failed to unearth an explanation from the government for the omission, despite spending yesterday afternoon placing “a lot of behind-the-scenes calls” to officials who, it seems, had given the impression that umbrella regulation would at least be addressed by the chancellor.
‘Level playing field’
Putting a brave face on his sector being overlooked, or worse, is Alex Fraser, chief operating officer of Compass Contracting.
He told ContractorUK: “Although there was reference to increased funding across many government departments, there was nothing to suggest specific funding of the BEIS/EASI in their work to police the sector, or a new Single Enforcement Body.
“We [would] welcome any opportunity to put in place an effective regulation system that ensures fair treatment of all agency workers and a level playing field for tax collection. Better for workers, a boost for compliant umbrellas, and fairer for UK taxpayers.”
3/Disguised Remuneration – HMRC to target promoters of tax avoidance
Autumn Budget 2021 contains a four-part HMRC package to “clamp down on the supply of tax avoidance arrangements,” to raise £130million over four years.
But that yield is projected to come solely from HMRC penalties, which are tied to two of the new package’s four parts.
One of the two is a new power so HMRC can make UK entities facilitating the promotion of tax avoidance by offshore promoters,” subject to a “significant additional penalty.”
Despite the tough talk, it’s all a bit “disheartening” to tax expert Graham Webber because, he says, it “displays a naivety [from policymakers] that should have disappeared long ago.”
“In the space of contractor schemes”, explained Mr Webber, of tax dispute advisory WTT Consulting “the majority of such arrangements claim to be based offshore.
“UK entities are used to promote and perhaps legitimise the offerings, but often these are [just] conduits, rarely having funds or strong balance sheets.
“Given the relative ease with which an offshore entity can establish a UK company to sell their tax avoidance product, and then close quickly to avoid HMRC – which is not renowned for being able to move quickly -- do we think this [£130m revenue] target is realistic? No, we do not.”
A bit like how umbrellas perceive the absence of regulation at Autumn Budget, the tax dispute expert says the package is “an opportunity missed.”
“If HMRC does manage to trap a promoter and avoid the inevitable legal actions, why not visit the promoter with the tax and National Insurance Contributions due?” asked an exasperated Mr Webber, adding: “And why limit the promoter’s liability to a fine which, if tax based, may not be quantifiable for many years -- thereby risking the promoter’s flight from the UK?”
The four-part package includes a ‘naming and shaming’ power for HMRC, whereby the identity of the promoter, the schemes and how they promote the avoidance could be disclosed to taxpayers “at the earliest possible stage.”
‘Promoters cannot escape’
And the Budgetary package includes a freezing order, whereby any avoidance penalties charged can be subject to an order, with funds able to be ring-fenced “to make sure that promoters and enablers of tax avoidance schemes cannot escape the financial consequences of their non-compliance.”
The final part of the package grants HMRC the power to present winding-up petitions to the court for companies or partnerships operating against the public interest.
At Clarity, managing director Ms Smith is pleased. “Maybe [here, we finally have from HMRC] some joined-up thinking with Companies House, to remove blatant cloning of businesses for these purposes [-- avoidance and the promotion of avoidance].
“But please,” she continued, “let’s put [the powers] to use now, rather than after fraud has been committed.”
4/ Discovery Assessments – Retrospective application of a revised policy
With the potential to unsettle contractors is a new HMRC paper making a “technical clarification” to its existing power, afforded to the Revenue under Section 29 TMA 1970, to reopen closed periods.
‘HMRC are wrong’
“As we start to wade through the various policy papers following the Budget, it has not taken [me] long to find retrospective legislation,” posted WTT Consulting’s head of tax investigations Tom Wallace, clearly not thrilled at his own discovery.
“HMRC have long-believed that they can use Discovery Assessments to recover the High Income Child Benefit Charge, [even though] both the First Tier Tribunal and the Upper Tier Tribunal have said that HMRC are wrong [to do so].”
The tax investigation expert added that rather than changing the legislation, or approaching the Court of Appeal to challenge the position for prior years, “we again see [HMRC resort to using] retrospective legislation to overturn the decision of the lower courts.”
‘Reaching for the time machine’
“HMRC continues to play with loaded dice but it cannot be long before the courts say enough is enough,” Mr Wallace, a former tax inspector continued. “It simply cannot be right that HMRC can rewrite historic legislation just because they don't like the result it produces using the powers of hindsight.”
Also at WTT, Mr Webber pointed to the relatively “low value” of the tax at stake, but said that in itself meant it was “worrying that reaching for the time machine is seen as a solution” by HMRC.
5/More from HMRC – Simplification, MTD, bearing down
In the name of building a “modern digital tax system,” contractors and other taxpayers will be covered by a Single Customer Record and Account, as well as Making Tax Digital (projected to raise £1.6bn in additional tax revenues by 2026-27).
Spending Review 2021 (published next to yesterday’s Autumn Budget) further commits to £292m over three years to help HMRC tackle the tax gap, and provides £55m next year for the Taxpayer Protection Taskforce (previously announced) to expand HMRC compliance work and “pursue” covid-19 income support scheme abuse.
6/Limited companies – Entrepreneurs receive warm words; little else
To listen yesterday to the chancellor, many people would expect entrepreneurs to be guaranteed some fresh support from the government.
Mr Sunak spoke of “backing business;” “the imagination and drive of our entrepreneurs;” “innovation coming from the…risk-taking of business,” and his ambition to make the UK “the most exciting and dynamic place in the world for business.”
‘Scandal of our situation’
But after the chancellor’s Red Book was published, ‘Forgotten Ltd’ took to LinkedIn to imply there was no prospect of the campaign group changing its name.
“[We will be] continuing to engage with many parties to keep the scandal of our situation alive,” said the group, which was set up in the pandemic to lobby for government support for limited company directors.
“We also are looking to engage with all groups looking to change the dial of how Boris Johnson views business -- especially our sector -- before it’s irreversibly damaged.
“For so many, it seems counterintuitive for any government to be overtly attacking the very mechanisms that provide their ‘income’ via entrepreneurialism, creativity and thus job creation and so tax.”
‘I’m not prepared to add to the squeeze on small companies’
At this Autumn Budget, the government says it will keep expanding the Global Entrepreneur Programme; give the British Business Bank £1.6m to provide SMEs with debt and equity finance, and fund the delivery of gigabit capable broadband and 4G “across the UK.”
Getting closer to the ‘bottom line’ which companies appear more interested in, the chancellor yesterday said he was “not prepared to add to the squeeze on...small businesses.”
While this seems to be Mr Sunak acknowledging traders are hurting under his watch, the acknowledgement, and the claim he wouldn’t add to their pressures, angers Seb Maley.
“[The] social care levy, corporation tax changes in 2023 and IR35 reform have and will hit freelancers, contractors and small business owners hardest,” fired Mr Maley, CEO of Qdos.
“The chancellor was self-congratulatory about the government’s treatment of entrepreneurs. [But] this is now a tired-out, unconvincing rhetoric and one that’s falling on deaf ears.”
Similarly confounded, DNS Associates said a “one-sided focus” of helping all workers bar the independents ones was odd, and went against the grain. Its boss Mr Agarwal explained:
“The contracting sector is arguably the most bullish sector and if it were not for contractors, the UK’s very hot Fintech scene would never have gained the traction it has for the country.”
‘The hoped-for didn’t happen’
At one stage in his speech, the chancellor sounded as if he was set to cancel the planned corporation tax hike -- an incoming sting for companies with more than £50,000 in profits.
But, observes Moore Kingston Smith’s head of tax Tim Stovold, a bit like umbrella company regulation, “the hoped-for climb down on the corporation tax increase due to apply from April 2023 did not make an appearance.”
7/Misc: R&D, AIA, Visas, Duties, and making the UK a Science/Tech Superpower
- Reform R&D tax reliefs by expanding qualifying expenditure from April 2023 to include data and cloud costs.
- Invest £5bn over the Spending Review 2021 period for health-related R&D.
- Increase core funding for the UK’s top universities and research institutions by £1.1bn per year by 2024-25.
- Extend the temporary £1m Annual Investment Allowance to March 31st 2023.
- In spring 2022, launch the Scale-up, High Potential Individual, and Global Business Mobility visas to attract highly skilled people to the UK, and launch a Global Talent Network to source and import talented people into science and technology sectors.
- Fully fund Horizon Europe; establish an Advanced Research and Invention Agency with £800m by 2025-26, increase Innovate UK’s annual core budget to £1bn.
- Launch UK-wide numeracy programme Multiply, with £560m, to boost basic maths skills.
- Pour in £5.7bn for eight English city regions to transform local transport networks through London-style integrated settlements.
- Invest £35bn in rail investment over the Spending Review 2021 period including High Speed Two and rail enhancements focusing on the Midlands and the North.
- Reward companies for adopting the UK’s merchant shipping flag, the Red Ensign.
- Reduce Air Passenger Duty on domestic flights from April 2023.
- Reduce alcohol duties, including the main ones from 15 to 6.
- Introduce Draught Relief for pubs, with the effect of cutting the cost of a pint by 3 pence.
- Cancel the planned rise in fuel duty.
Editor’s Note: For additional personal finance announcements at Autumn Budget 2021, see the viewpoint piece of wealth adviser Paul Mayhew, and for mortgage-related announcements, see the review piece by Freelancer Financials CEO John Yerou.