Contractors ‘won’t let Autumn Statement’s tax tail wag the dog,’ despite IR35-dividend combo biting them hard
Limited company contractors won’t let the ‘tax tail wag the dog’ in the aftermath of Autumn Statement 2022.
This means contractor-directors won’t likely quit their PSCs just because the dividend allowance is facing two cuts.
Even if it is being cut from its £2,000 today to just £500 in April 2024, contractors still won’t let such a small sting call the shots, believes SG Contractor Accounting’s Dan Mepham.
'Make the most of things'
But the same limited company contractors should absolutely go ahead on outside IR35 contracts to distribute as much as is sensible -- before the cuts to the allowance start to niggle.
And that first cut happens on April 6th 2023, resulting in the allowance dropping to £1,000, and then it gets cut again on April 6th 2024, resulting in the £500 allowance.
Contractors with their own PSC on outside IR35 roles must therefore “make the most of things by 2023” -- at the latest, with their dividends, says Kate Cottrell of Bauer & Cottrell.
'No repeal, of the IR35 repeal, that was repealed'
Out of all the measures from the chancellor’s Autumn Statement 2022, it is the changes to dividends -- co-existing with no changes to IR35 reform -- that target the heart of contracting.
Underlining the duo’s significance, an umbrella company yesterday chose just three measures to tell its ‘followers’ about from Jeremy Hunt’s entire Green Book, and both made the cut.
In fact, Hunt unveiled a dividend allowance cut, a change to the 45p tax threshold, and IR35 reform is staying, “so no repeal, of the repeal, that was repealed,” posted Clarity Umbrella.
'Chancellor yesterday failed to address IR35 issues'
Yet it’s not just umbrellas -- others in the contractual chain like recruiters, typically the ‘fee-payer’ under the Chapter 10 rules, are dismayed too.
Paul Farrer, chair of staffing group Aspire says the chancellor simply “failed” yesterday “to address issues around IR35”.
As to why Hunt ought to face IR35 issues, another agency boss says Autumn Statement’s real architect -- who was seen yesterday directly over Hunt’s shoulder, imposed IR35 on steroids.
“It’s the current prime minister Rishi Sunak who turbocharged IR35, when he was chancellor,” the agency boss -- Matt Collingwood, director at VIQU told ContractorUK.
“So as much as we were hoping to hear Hunt announce IR35 reform faced a review, we weren’t holding our breath [because of who is in Number 10]. We’re very disappointed.”
'No surprise on IR35, given that Sunak is PM'
Chartergates, a law firm confirms: “Autumn Statement was largely silent on the off-payroll working rules.
“This should come as no surprise, as the now-prime minister Rishi Sunak, supported the introduction of the 2021 IR35 rules during his time as the chancellor.”
The upshot is clear to Cottrell. “The off-payroll rules are without doubt here to stay,” the former tax inspector said last night.
“Oh, and beware of HMRC investigations. The taxman is getting even more money at Autumn Statement 2022 to police the system. Just check out 5.2 of the Green Book.”
'Serious tax fraud'
At 5.2, a further £79million is vowed for HMRC over five years to “allocate additional staff to tackle more cases of serious tax fraud and address tax compliance risks among wealthy taxpayers.”
The Autumn Statement adds: “This investment is forecast to bring in £725million of additional tax revenues over the next five years.”
But widely seen as a policy change that is a fait accompli in the tax authority’s eyes, Hunt made no mention yesterday of any intent to remove the ‘small company’ exemption.
'No plans to abolish IR35 small company exemption'
Paradoxically, even such a non-measure increases the administrative burdens related to status that PSCs have hanging around their necks.
Martyn Valentine of The Law Place explains: “As there are no plans [from the chancellor] to abolish the…exemption, limited company contractors will need to take reasonable care.
“[And they need to take that reasonable care] in assessing whether the IR35 legislation…[at Chapter 8 ITEPA 2003] will apply to an engagement where the client has confirmed it is ‘small’ within the meaning of section 382 of the Companies Act 2006.”
'Salt in the wound if you're a limited company'
However, Autumn Statement 2022 doesn’t require a removal of the small company exemption to make it a ‘bad’ Budget for contractors.
“[With no much-needed] changes to IR35 taxation…this latest attack [on dividends] is further salt in the wound for anyone working through their own limited company.”
Andy Chamberlain, policy director of IPSE fleshed out his grim assessment: “[So] the government is making it harder and harder for those who work for themselves.
“By slashing the dividend allowance, the government has once again demonstrated that it does not support small business.”
'Insult to injury'
A contract reviewer specialising in IR35, Seb Maley, agrees that slashing the dividend tax threshold adds “insult to injury” – an injury caused by IR35 reform’s cancellation being cancelled without little-to-no explanation.
“The government works on the basis that small businesses have pockets as deep as big businesses, and can absorb these freezes and tax hikes,” began Mr Maley of IR35 firm Qdos.
The firm’s CEO, Mr Maley added: “[But] the past few months have been a rollercoaster for contractors, in particular, who were led to believe that IR35 reform was to be repealed – only for the government to cruelly break this promise weeks later.
“If the chancellor thinks he’s put the issue of IR35 to bed, he’s mistaken. After backtracking on the IR35 reform repeal, calls for a review [to probe ‘zero-rights employment’] are likely to grow louder.”
'Hassle and headache'
Ryan Dawson, an IR35 project manager, found fault with the government’s treatment yesterday of micro-companies as well.
He posted: “If future budgets continue…in this way, contractors may consider that it's not worth the hassle and headache of running a limited company”.
But in a statement to ContractorUK, accountancy firm Integro Accounting reassured that “dividends will still very much be a key benefit for those working [on a] limited [company basis.]”
'Double-down on all financial planning aspects'
“Today’s allowance cut means that in the coming tax year…the typical contractor [will only be] paying an extra £87.50, and in the following tax year £131.25,” said the firm’s Christian Hickmott.
“The best advice we can give any contractor [to mitigate these tax increases] is to double-down on all aspects of financial planning. Then, make sure you have a proactive tax adviser who can help you navigate these turbulent times”.
But Mr Dawson, of Kingsbridge Group, believes it’s actually government that needs to act -- to fix misguided policy aims and to address claims about enterprise that its own provisions trounce.
'Yet another blow'
He called Autumn Statement “yet another blow” for commercial contractors because, in it, the government recommits to taxing such bonafide business-owners in a similar fashion to employees.
The IR35 project manager said: “[Chapter] 2.8 of the Autumn Statement only serves to support that view, saying a ‘fair tax system also ensures that individuals doing similar work pay a similar amount of tax, and those with unearned income also contribute.’”
“This government cannot claim to be the party of low taxation and champions of enterprise, when they stifle business growth, particularly [smaller companies] with punitive tax measures.”
'Firms should step in to incentivise contractors, if govt won't'
Brookson’s Matt Fryer enforced: “The economy needs flexible talent to support growth, including the infrastructure and energy independence projects that the chancellor yesterday prioritised [with over £600billion to be invested over the next five years].”
In his statement, Mr Fryer continued to ContractorUK: “Contractors are available to work ‘as and when’ their skills are required, and the personal risks associated with this flexibility should be reflected in the tax system.
“If the government is not going to incentivise the flexible workforce, businesses need to consider what else they can do to continue to make it an attractive option. This might include access to improved services or benefits, within compliance with the off-payroll working rules.”