Recovered from the contractor tax rollercoaster? Now put your finances on the same firm footing

To say it has been a turbulent few weeks for contractors and their service providers feels like an understatement.

The government has taken us all on a tax-driven emotional rollercoaster but by now, most of us have been returned unceremoniously to the ground with a reality-affirming bump, writes Matt Fryer, managing director of Brookson Group, a People 2.0 Company.

The ride you didn't want to go on

For any contractors out of the loop, here’s what happened. The entire contractor sector has been flung from the highs of an unexpected vow to repeal the off-payroll rules, sweetened with a series of limited company tax cuts -- all on September 23 -- to the lows of the whole package being U-turned on October 17, with the cuts to income tax, corporation tax and dividend tax all being shredded, culminating in a 180-degree turn on the IR35 reform repeal pledge. So in short, none of the promised good stuff for contractors is going ahead.

Of course, it’s all because the cogs of the rollercoaster ride are effectively ‘tax’ and ‘spend.’ Former chancellor Kwasi Kwarteng’s economic experiment -- intended to fuel growth -- got brought to a swift close by the response of global markets and investors. In particular the IMF.

Fiscally speaking, overcast is an understatement

Contractors don’t often need to dip into the marco-economy all that much, but given that it’s the reason Mr Hunt shredded the package which contained the good stuff, it’s worth a look. The government borrowed £303 billion in 2020/21 – that’s a peacetime record at 14.5% of GDP. And the government needs to borrow more now, to soften the blow of the energy crisis, at a time that credit is far from cheap.

Hunt’s orthodox fiscal plan which he previewed on Monday with his U-turn medley, and which he will flesh out at the Medium-Term Fiscal Plan on October 31st, is seeking to plug the gap. It’s now estimated by the IFS to stand somewhere between £60-70billion. Of this, £2bn is expected to be recovered from retaining the off-payroll rules, £18.7bn from the increase in corporation tax, £5.9bn from keeping the basic rate of income tax at 20%, and £0.9bn from the dividend taxation cut reversal.

All of these taxes hit independent contractors at a time that small businesses are struggling with the rate of inflation. The dividend rate (staying at the 1.25 percentage points increase that hit in April 2022) is a particular kick in the teeth to many company shareholders.

A silver lining, of sorts

The silver lining for those working inside IR35 is a commitment to the abolition of the National Insurance rise, which would, in effect, have been paid twice by umbrella employees. However, the decision not to apply this saving to PSC directors paid through dividends, just adds insult to injury for those working outside IR35.

So what can be done? In many ways, we’re back to brass tacks when it comes to tax planning. If you’re an independent contractor, it’s about structuring your arrangements to ensure you are making the most of the tax opportunities that you do have.

For contractors operating via a PSC, from April 1st 2023, companies with less than £50,000 of profit will not be subject to the full 25% or tapered corporation tax rate, remaining on the 19% rate.

Limited comany financial review -- run your own

This makes it imperative for contractors operating via a PSC to make the most of basic tax planning techniques, including:

  • paying an appropriate director’s fee;
  • claiming all legitimate expenses;
  • considering setting up a company pension scheme;
  • considering (with the right advice) appointing a second shareholder.

For umbrella company employees, tax planning is more restrictive. However, it is becoming more and more common for umbrella companies to offer ‘salary sacrifice’ pension schemes, and these are a good way to save for retirement in a tax-efficient manner.

Temptation, tax bills, and a telling response

But please don’t be tempted by tax avoidance schemes purporting to be umbrella companies – those offering 'too good to be true' take-home pay. These schemes are well and truly on HMRC’s radar and often it is the contractor who gets hit with tax bills down the line.

To all contractors, I further recommend considering more closely those financial areas outside of tax planning, such as mortgages and income protection. There are specialist providers and products in the market designed for contractors, and it is worth reviewing whether you have the right financial services support to ensure you are protected.

Turning to the IR35 reform repeal that never happened, HMRC’s comments about it are actually quite telling, given the Revenue said: “the underlying rules on off-payroll working are unchanged.” What this means is that contractors and employees are expected to pay the right level of tax according to their employment status.

A dodged bullet for contractors?

If you were to take an optimistic viewpoint, you might say that contractors have dodged a bullet here, by IR35 reform and the obligations and liability it imposes remaining around the necks of engagers and agencies. Be aware, the Treasury is now firmly under pressure to recoup tax revenue, and we know that HMRC teams have already scaled up resource to aggressively pursue non-compliance. But as I said, it will now continue to be end-hirers and fee-paying agencies who are deemed liable for any inaccuracies, not contractors.

What HMRC has not acknowledged – at least not publicly -- is that all of the problems created by the April 6th 2021 changes to IR35 still remain. Even 18 months after the reforms, the system is clearly not working as it should. It’s a key point acknowledged by prime minister Liz Truss, Mr Kwarteng, and a number of backbench MPs.

There is no doubt that some hirers have been reluctant to engage contractors at the risk of tax liabilities, and I’ve seen figures from IPSE which appear to confirm this. A crackdown on compliance is hardly likely to help change their minds.

The flaws of IR35 reform (cont.)

Other engagers, as we have seen, have been over cautious, forcing independent contractors into the unregulated umbrella market. Yet for those wrongfully deemed to fall inside IR35, there is currently no mechanism by which a contractor can legally appeal what they believe to be an inaccurate status determination.

This drives independent contractors towards hirers who have robust IR35 policies in place, where they can work on compliant outside IR35 contracts.

It doesn’t need to be like this. I’m going to state an unpopular opinion here. We do need the off-payroll working rules -- because we need a useable framework which allows hirers to engage a skilled flexible workforce that can deliver projects and allow their business to grow.

Making hirers responsible for compliance is an efficient way to manage this, removing liability and risk from individuals. But the system needs to be fair on all parties and easier to navigate.

Finally, after all this IR35 chaos, take a moment...

It’s high time for the government to heed the advice offered by the 2017 Taylor Review, echoed more recently by the House of Lords, the Public Accounts Committee and the National Audit Office. Whether we need another IR35 review, as promised by Liz Truss, is open to debate.

In the meantime, catch your breath, let your knuckles return to normal colour, and take a moment to make sure that your contractor finances are structured to put you in the best possible position to make the most of the off-payroll rules as they stand.

Profile picture for user Matt Fryer

Written by Matt Fryer

Matt is a Chartered Tax Advisor with 18 years' experience of advising on tax planning and compliance. Matt has been with Brookson since 2009, having previously worked for Big 4 accountants, KPMG and PwC. Matt’s primary role is to ensure that the services provided by the Brookson Group comply with relevant legislation and regulatory requirements. Matt is also a Board member of the FCSA, the UK's leading membership body dedicated to promoting supply chain compliance for the temporary labour market.

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