A contractor’s guide to ‘trickster’ Rishi Sunak’s Spring Statement 2022
A freshly announced £3,000 lift in National Insurance thresholds from July. To counter an already announced 1.25 percentage points hike in National Insurance from April.
Little wonder, perhaps, why the architect of both measures and their mind-boggling effect, chancellor Rishi Sunak, was last night likened to a ‘trickster on Westminster Bridge.’
'Sunak isn't helping; it just looks like he is'
Explaining her unflattering characterisation of HM Treasury’s boss, former Treasury secondee Rebecca Seeley Harris, a tax lawyer and expert on IR35, explained:
“Mr Sunak reminds me of one of those tricksters that you see on Westminster Bridge. The ones who move all the cups around to make it look simple! But you can NEVER win.
“[The chancellor] is full of showmanship yet at the end of the day, he’s not actually helping. It just LOOKS like he is.”
- raising the level at which people start to pay NICs from £9,800 to £12,750;
- confirming 1.25% extra is to be added to NICs (and dividend) payments from April;
- cutting income tax by one pence in 2024;
- cutting five pence from fuel duty from six o’clock last night; and;
- raising the Employment Allowance to £5,000.
All five measures, outlined below, feature in Spring Statement 2022.
Delivered yesterday, the statement came against a backdrop harder to ‘out-gloom’ – the biggest drop in living standards in the UK for 66 years, according to the OBR.
But two measures more affecting of contracting and contractors did not feature in Spring Statement, despite expectations, even alerts, that they would. They are below, before the five.
1. IR35: no off-payroll rules’ extension to small companies
Despite being the “obvious step for HMRC,” the extension of April 2021’s reforms to IR35 beyond large and medium-sized companies was not announced by the chancellor yesterday.
His Spring Statement contains not even a mention of IR35; off-payroll or employment status.
Only last month however, in February, HMRC was told by a no-nonsense House of Lords inquiry to focus on engager appeals, and “address problems” related to IR35, like blanketing.
But potentially explaining why Spring Statement contains no revision to the rules, Treasury minister Lucy Frazer has since answered away many of the Lords’ IR35 concerns in a letter.
'Double taxing IR35'
Despite the minister’s letter (of March 9th); one concern of the Lords is still very much alive, according to Qdos operations director Nicole Slowey.
“HMRC will ‘double-tax’ IR35 should the tax office find that a firm has wrongly engaged a contractor outside IR35,” she began in an online post.
“[So] the fact that contractors have already paid income tax and corporation tax on their earnings is not taken into account when HMRC hands the fee-paying party a tax bill.
“The tax office’s Jim Harra has admitted that contractors can reclaim this. However, in my opinion, it’s missing the point. And….[so] HMRC could have an administrative nightmare on their hands. But this is one, you could argue, that they have brought on themselves.”
Slowey isn’t alone in feeling the need to advise on outside IR35 contracts.
“Contractors need to do their ‘due diligence’ and make sure” the engagement really is not caught by the off-payroll rules, advises accountant Alan Broome.
Boss of tax advisory Acumenica, Mr Broome added: “Many of the outside IR35 contracts we see have tax clawback clauses in them, meaning that even if the end-user has made, and is responsible for, the outside determination, the contractor could still end up with the bill on their doormat. So make sure you know what you’re signing.”
'HMRC is now IR35-busy'
It is not just contractors who are still feeling the effects of the April 2021 reforms, however.
Just days after Orange Genie revealed that a medical giant is being probed by HMRC under the off-payroll rules, IR35 contract reviewer Seb Maley reminded that the ‘soft-landing’ has almost expired.
“[So from April 6th] HMRC can hit businesses with penalties, along with tax liability and interest,” he warns.
“The tax office has already handed out £263million-worth of IR35 bills in the public sector, and is now busy enquiring into the compliance of private sector businesses [too].”
To agency boss Mark Gale, contractors need to hope that HMRC is neither overly successful nor overly unsuccessful with IR35 compliance, if the extension to small companies is to continue to not be implemented.
A director at Identifi Global Resources, Mr Gale said: “If HMRC had been successful in actually taking more taxes from the UK contract market, they would have been greedy and gone after small businesses regardless, as they're always interested in generating more.
“[On the flip side] if they hadn't been able to successfully achieve sufficient tax increases from the UK contract market with the current [IR35] rules, they would naturally expand out the list of potential targets to include currently exempt smaller companies.”
2. The regulation of umbrella companies via the SEB
Also absent from Spring Statement 2022 is the Single Enforcement Body, perhaps because the Treasury’s Ms Frazer felt like she dealt with it already in her March letter.
“[The minister simply saying the SEB] will be ‘brought forward when parliamentary time allows’ is simply not good enough,” says Chris Mattingly of WTT Legal, quoting the minister’s wording.
Mr Mattingly added: “As a result of the off-payroll working reforms to the private sector, we now have more contractors using umbrellas, so the implementation of the Single Enforcement Body cannot come soon enough.
“Urgent intervention is needed to regulate umbrellas and remove the promoters of tax avoidance from the supply chain.
“And as each day is lost, more unsuspecting contractors are getting drawn into the tax avoidance net and all the misery that will follow.”
On the eve of the Spring Statement, CWCAS director Carolyn Walsh said that if the chancellor did not announce the SEB, it would be “bordering on the obscene.”
'Same old regurgitated Treasury mantra'
Feeling just as strongly about umbrella company regulation is lawyer Ms Seeley Harris.
Pointing to the financial secretary to the Treasury’s letter a few weeks prior to Spring Statement, ReLegal Consulting’s founder said: “On umbrella companies, it says that officials are ‘working to build a detailed and up-to-date understanding of the market.’
“But the Treasury minister’s letter then fails to give any meaningful information about what will be proposed and what the timelines [of the Single Enforcement Body] are.”
Ms Seeley Harris continued: “I had high hopes that Lucy Frazer would bring something new to the role of financial secretary to the Treasury but, alas, it seems to be the same old regurgitated Treasury mantra.”
'We shouldn't be too surprised'
Clarity Umbrella agrees it’s like history repeating itself, with umbrella contractors being the losers; again.
“Well, it appears that the chancellor has once again omitted any information on the regulation of umbrella companies. I guess we shouldn’t be too surprised there,” the firm’s Lucy Smith said yesterday, just moments after Spring Statement.
“Instead, the government will continue to penalise contractors who contribute significant amounts of money to the Treasury coffers without supporting them to ensure that their money is looked after by a compliant business.”
'Be careful what you wish for'
Yet Graham Webber, who also advises contractors, said in response to an online appeal for HMRC to regulate umbrella companies – ‘be careful what you wish for.’
“Do you really want HMRC regulating umbrellas? That would result in an extremely narrow view of what regulation means – [such as having to] pay the tax HMRC thinks is due.”
Mr Webber, of WTT Consulting followed-up: “[That narrow, tax-focussed regulation by HMRC would be at the cost of] catering for the employment rights, fair pay [and other aspects] that umbrella companies SHOULD be regulated for. We do not need the tax tail wagging the commercial dog.”
3. Raising the NICs threshold
Widely accepted as ‘good news,’ the chancellor used Spring Statement 2022 to announce an increase at the point which individuals start to pay National Insurance Contributions, effectively handing out an extra £330 a year.
“The NI threshold will align with the [£12,570] personal tax-free allowance from July 2022,” observes chartered accountant Helen Christopher, who today outlines the impact of the chancellor’s National Insurance changes, exclusively for ContractorUK.
Orange Genie’s chief operating officer, Ms Christopher recommended: “If, like many [of our contractor] clients you have already set your salary for 2022/23, you may want to think again.”
'Limited company directors may choose larger salary'
Issuing similar advice is SJD Accountancy.
The accounting firm’s head of technical, compliance and payroll Joanne Harris said: “The increase in the National Insurance threshold to £12,570 from July was a welcome surprise.
“The change means that from July 2022, limited company directors may choose to take a larger salary from the business reducing the amount of dividends paid.”
In a seven-point rundown of Mr Sunak’s announcements another contractor accountant, SG Accounting, ranked the lift in the NICs threshold as first. A sure sign of its importance.
“This is a Class 1 saving of £300 per year, now based on the increased rate of 13.25% including the new 1.25% Health and Social Care Levy,” advised SG’s Dan Mepham.
'Umbrella contractors feeling the pinch'
But while the importance of NICs thresholds raising isn’t in dispute, its financial impact seems to be.
Initial calculations post-Spring Statement suggested a boost per umbrella employee of £267, but WTT Legal last night provided some less positive, more sobering figures.
Assuming a taxpayer is not of state pension age but is resident in England and Northern Ireland, with a standard tax of 1257L, and whose umbrella charges a £100 margin, the firm’s Mr Mattingly said:
“While the increase in the primary threshold for employees Class1 National Insurance contributions to £12,570 will help lessen the impact of the [Autumn] Budgetary changes due to come into effect on April 6th, umbrella workers will still be feeling the pinch.
“Before today’s announcement, a typical contractor working through an umbrella with a billing rate of £350 per day was going to see their annual take-home pay reduce by £1,022 from April 6th , mainly due to the 1.25% point increase in Class1 National Insurance rates for employers and employees.
“But from July 6th [when the NI threshold rises], they will be £665 worse off compared to today. So without factoring in the increase we are seeing in our cost of living, umbrella contractors will need their billing rates to increase by 1.75% -- just to stand still.”
'Their situation has not improved'
Meanwhile, Compass Contracting’s chief operating officer Alex Fraser reflected: “The increase in the NICs floor of £3,000 will more than compensate 70% of workers for the rise in NICs previously announced for next month, brought in to help pay for the impact of Covid on funds available for the health service.
“However, there will be many part-time workers who will not benefit from the threshold rise and will still have to pay for the £300 Social Care Levy. So their situation has not improved”.
As for limited company directors operating IR35, the higher NI threshold will likely prompt them to reduce the amount they subject to PAYE “slightly,” to allow for the increase in employer NICs (from April).
Issuing the assessment, ICAEW member firm CWCAS added: “Conversely, for those working outside IR35 and drawing a small salary, there will be a small increase in net pay due to the increase in the threshold before NI is deducted, and an increase in the employer's NI due to the covid-caused social care levy.”
'Go the whole hog'
The complicatedness of it all, courtesy of Mr Sunak, is too much even for tax lawyers.
“So the chancellor has raised the NICs rate threshold to the same as income tax, but why did he not just go the whole hog and combine them?!” asked a clearly vexed ReLegal Consulting.
“Instead [and despite his speech talking of ‘simplifying the tax system’], Mr Sunak has given the UK a separate ring-fenced tax called the Health and Social Care Levy. Isn't that what National Insurance Contributions are for!?”
In an official breakdown of the NICs threshold lifting (which stipulates it adds £2,690 in tax-free earning for workers), the government spoke of ‘ensuring individuals see the benefits of the move as soon as possible.’
'No immediate benefit'
But Robert Sharp of Orca Pay Group believes even its beneficiaries won’t be elated with the timing.
“The new NI threshold will be £12,570 and while this has been met by some quarters as a real positive, the fact that this won’t be introduced until July doesn’t give the immediate financial benefit many contractors need right now,” he said.
Software teams and payroll teams probably won’t be entirely thrilled either.
Cloud payroll software expert Sam Radion posted: “The text of the Spring Statement is interesting…[as it] says ‘July is the earliest date that will allow all payroll software developers and employers to update their systems and implement changes’ [to reflect the NI threshold increasing].
“I wonder how the government came up with this? Software companies usually have release cycles: some are monthly, some are annual and some, like us, update as needed. They have also decided the changes to the NI thresholds come into effect July 6th, which will certainly pose some interesting challenges for payroll teams.”
4. Cutting income tax by one pence in 2024
Initial fears after Spring Statement 2022 that a 1p shaving in income tax will be too late to keep some contractor companies afloat have been largely replaced by accusations Mr Sunak is political point-scoring.
In fact, ReLegal, Clarity and status advisory Bauer & Cottrell all pointed out that the chancellor’s cut takes effect -- “conveniently ” -- just before the next general election.
Similarly unmoved by the “biggest net cut to personal taxes in over a quarter of a century” (as Mr Sunak modestly described it), Qdos doubts it will have much impact on limited company contractors , and Orca says it is “way too far off” (2024) to matter to contractors, many of whom are reeling from the cost of living now -- in early 2022.
5. Cutting five pence from fuel duty from six o’clock last night
Just before Spring Statement 2022, contractor body IPSE expressed concern that despite petrol prices surging, the UK had not followed the example of Ireland, The Netherlands and Sweden by cutting fuel duty in wake of sanctions imposed on Russia over its invasion of Ukraine.
So IPSE policy director Andy Chamberlain is now backing the chancellor’s decision to yesterday cut fuel duty by five pence per litre.
The cut took effect at 1800 yesterday.
'Chancellor could have gone further on fuel'
But, in the same breath as welcoming the move, Mr Chamberlain said some of Mr Sunak’s offering “don’t’ go far enough,” especially as contractors are now returning to unimpeded travel thanks to covid restrictions lifting.
“Slashing fuel duty by 5p [is among yesterday’s] welcome developments,” agreed Ms Slowey at Qdos. “But dig a little deeper and the argument that the chancellor could and should have gone further is a valid one.”
Regularly travelling to clients, conferences and catch-ups, lawyer Ms Seeley Harris also sounds aware that the fuel cut is a temporary measure, lasting only until March 2023.
She reflected: “Five pence off fuel duty will help. It still doesn't seem enough though.”
6. Raising the Employment Allowance to £5,000
A non-starter of a measure from the chancellor for one-person limited companies as they are excluded from it, the Employment Allowance increasing to £5,000 is being framed as an unwelcome starting pistol for the creation of more Mini-Umbrella Companies.
WTT Consulting’s director of tax investigations Tom Wallace explained:
“Given that the Employment Allowance is one of the targets of Mini Umbrella Company fraud, [this extra £1,000] will do nothing to dissuade the current proliferation of MUCs, which is a worry for the contractor supply chain.”
'Spring Statement 2022 doesn't amount to much, unless...'
Even if the government does say that the more generous EA will allow employer NIC-free employment of four full-time members of staff for an impressive-sounding 495,000 firms, Orca’s Mr Sharp is alarmed too.
“Spring Statement 2022 really doesn’t amount to very much at all unless you are [a fraudster] running mini-umbrella companies,” he took to LinkedIn to warn.
“[That’s because] Sunak announced that he would be increasing the Employment Allowance to £5,000 -- in turn making mini-umbrellas all the more attractive. You actually can’t make it up! Especially as there was no mention of the much-needed Single Enforcement Body”.
'Not happening quickly enough'
Compliance group Professional Passport even suggests adding £1,000 onto the EA might make a bad situation worse, as HMRC is already “struggling to find and shut down mini umbrella companies.”
The group’s chief executive Crawford Temple further warned: “The worry is that this latest move by the chancellor will serve to further incentivise and motivate such firms to create more tax avoidance strategies.
“There was no reference [in Spring Statement] to any increased resources of budget towards enforcement [specifically against MUCs], which is vital in ridding the industry of disguised remuneration schemes. And it is not happening quickly enough in my opinion.”
Final thought: 'I'm deeply worried'
Last night, trying to stand back from the detail of Spring Statement 2022 -- its announcements and non-announcements, a contractor accountant sounded genuinely saddened.
“For the contracting sector, nothing was covered properly, not even in relation to umbrella companies which have arguably caused more harm to UK contracting than service,” began Sumit Agarwal of DNS Accountants.
“To my further dismay, the chancellor offered no real relief from additional energy costs, higher than normal inflation, increased costs of living. And these are all things which are hurting almost every person in Britain.”
Mr Agarwal concluded: “Only time will tell if the popularity of a chancellor who was largely cheered -- outside of UK contracting -- for his bold measures to tackle covid will sustain under the current and future pressures, but with no sincere efforts from him to manage the inflation that threatens us all, for now, I’m deeply worried.”