Spring Budget 2023: Over-50s tipped to take inside IR35 contracts via umbrella companies

Puzzled contractors yesterday got “game-changing” pension reform they didn’t ask Jeremy Hunt for -- yet no IR35 reform help which they did ask for, even though it can cause early retirement.

But the chancellor retaining the off-payroll rules, which have led PSCs to shut prematurely, while he lifted the annual pension allowance will entice ‘returnees’ to land inside IR35 roles.

Appreciating the irony of his forecast, Matt Fryer hinted that in a bare Budget for contractors, Hunt hiking the allowance is the “main” perk for over-50s able to restart work via a brolly.

'Over-50s back to contracting on inside IR35 roles via umbrellas'

“This will be of benefit to all high-earners and is a common tax-planning technique for contractors, both those operating via a PSC or umbrella,” began Mr Fryer, boss at Brookson. 

“In my view, [this increasing the allowance from £40,000 to £60,000] is likely to attract some over-50s back into contracting, even into inside IR35 contracts via umbrella companies. 

“This is because high-earning umbrella employees will perhaps be the biggest beneficiaries of this measure, as they will now be able to access even greater tax and NIC savings if they are able to enter into pension salary-sacrifice agreements with their employer.”

'An extra £1,500 a month'

More contractors using brollies to push money into their pension while working is indeed a firmer prospect thanks to Hunt’s hike, Clarity Umbrella confirmed to ContractorUK.

“The annual limit rising…means that an extra £1,500 a month can be put away tax-free, reducing tax and NICs if using a salary-sacrifice scheme,” says Clarity’s boss Lucy Smith.

DNS Associates goes as far to hail the 50% uplift in the amount that can be contributed to a pension, with tax relief eligible on it, as “the only big positive” for both contractor-types.

'Reduce corporation tax liability by £5,300'

“But especially for contractors operating through limited companies, as they can consider contributing an additional £20,000 into their pension pot from next year,” says the tax firm.

“The additional contribution will reduce the corporation tax liability by a significant amount of £5,300 for profits subject to the 26.5% rate [effective from April 6th 2023].”

Blick Rothenberg is more cautious, pointing out that as part of the increase to the annual pension allowance, the tapered allowance will rise from £4,000 to £10,000.

'Restrictive'

“This is a welcome increase although those on higher salaries will still consider the £10,000 allowance to be restrictive,” says the accountancy firm.

“[Such pension savers] will need to continue to be mindful that contributions, including employer contributions, in excess of this figure are subject to the pensions savings charge.”

Downbeat and stumped rather than cautious, is chartered accountant Tim Walford-Fitzgerald, who is trying to fathom Hunt helping returnees while leaving IR35 reform untouched.

'Missed opportunity'

The accountant says for a ‘back to work’ Budget, it has to be “disappointing” to not see “adjustments” to IR35 reform or the “long-running problems” it causes in the contractor workforce. 

“The chancellor has overlooked this group and missed the opportunity to…[remove] the uncertainty of overly cautious categorisation imposed by artificial rules.”

A partner at HW Fisher, Mr Walford-Fitzgerald also said: “Contractors often enjoy the freedom of running their own businesses and the protection that a limited company provides.

“But [thanks to the off-payroll rules they] find themselves being treated as regular members of staff for tax purposes. 

“The failure to address this in [yesterday’s] Budget means we [will] continue to see inequality for contractors who are being taxed as though they are an employee -- but without the benefits and protections that a full-time employee gets.”

'Unsurprising on IR35'

IR35 critic Andy Chamberlain shares the disappointment.

But he says Hunt looking the other way when given an opportunity to address a framework he reinstated just five months ago was always foreseeable.

“The lack of any positive news on IR35 is disappointing but not surprising,” said Mr Chamberlain, sounding aware HMT spoke only on March 9th of “no plans to repeal the reforms to the off-payroll working rules.”

'No one should be pushed out of the workforce for tax reasons'

The policy director for IPSE, Mr Chamberlain also told ContractorUK: “Despite much of Spring Budget focusing on encouraging labour market participation, the chancellor seems to have missed one of the most obvious barriers to the over-50s re-entering the workforce.

“During his speech the chancellor said, ‘no one should be pushed out of the workforce for tax reasons.’ Well, we believe that is exactly what the IR35 rules have done.

“The removal of the lifetime pensions allowance will benefit some, but getting rid of IR35 [reform] would have been a far more direct way to free up the labour market and drive growth.”

'Pensions game-changer'

Taken with Hunt’s move to axe the lifetime allowance so it no longer caps contributions at all from April 2024, the annual allowance pensions boost is a “game-changer,” however.

Of her assessment, Hargreaves Lansdown’s Helen Morrisey explained: “[Yesterday’s] decision to effectively abolish the lifetime allowance and boost annual allowances from April 6th 2023 brings a breath of fresh air to those whose retirement planning has been stifled by years of tax cuts and freezes.”

But it is a change to the game (or “joke” according to NumberMill’s Louise Rayner, who says only the “truly wealthy” stash away £60k a year), which contractors didn’t ask the government for.

'Umbrella regulation would have been better'

Coming a touch closer to success, the contractor sector wanted regulation on umbrella companies, and got instead new HMRC measures targeting avoidance scheme promoters.

The feeling of being short-changed by the chancellor was last night widespread.

“[This is] probably a complete waste of paper,” wrote a LinkedIn user, referring to the Budget Red Book. “

“The space [on this page] could have been used for umbrella regulation [instead].”

'Government can't get its umbrella act together'

Fred Dures, founder of Payepass agrees. “Introducing tough measures to stop tax avoidance schemes would be a step in the right direction but don’t hold your breath.

“The government has often promised to stop tax avoidance but comes up short time and time again,” he says. “When it comes to the umbrella industry, the government can’t seem to get its act together.”

Presented by ContractorUK with a few of Hunt’s proposed HMRC measures, even one of its former officials came across as unmoved.

“While the increase will deter some,” said WTT Group’s tax investigations director Tom Wallace, referring to tax fraud prison sentences being upped to 14 years, “HMRC traditionally only prosecutes the most offensive tax frauds.”

“Instead, [the Revenue] prefers to settle the majority by civil means. The real deterrent -- which would have had a much bigger impact -- would be to increase the number of criminal investigations they undertake with a view to prosecution.”

'Closing avoidance loophole will have limited impact'

At Spring Budget 2023, the government says it will legislate to close an avoidance loophole that can leave HMRC out of time to assess tax due on capital gains when an asset is disposed of under an unconditional contract.

In line with his stance yesterday to ContractorUK (that a consultation on a new criminal offence for HMRC ‘Stop’ notice flouters will stop hardly anything), an underwhelmed Mr Wallace said: “This measure will have limited impact.

“[Or at least], it’ll have limited impact on most taxpayers, and is designed to tackle transactions that in the main are artificial.”

'Prosecutions regretfully rare'

The Low Incomes Tax Reform Group’s Meredith McCammond last night suggested that the government’s attempt to address avoidance will wrongfoot.

“Many of the Disguised Remuneration arrangements we’re aware of appear…to be more akin to casual, fraudulent abuse, as opposed to sophisticated tax avoidance [that Spring Budget appears to target at chapter 4.40].

“[We were hoping and] expecting HMRC to say they were going to aim for more cheating the public revenue-type prosecutions,” the LITRG’s technical tax officer told ContractorUK. [Regretfully though] these have been very rare”.

'Too little too late for 10 Loan Charge contractors'

While it is no substitute for regulating umbrella companies via the Single Enforcement Body, action against avoiders is hard not to support, indicates IWORK.

Indeed, while it represents “too little too late” for ten people who faced the loan charge, Hunt hitting avoiders “will strike a chord” with the self-employed, says the firm’s Julia Kermode.

Alarmingly, it appears only a few chords in the Budget stand a chance of resonating with people who have ‘gone it alone.’

'Two whole years to run a tax guidance review'

“The single measure I can see with tiny traders in mind is HMRC being committed to transform its guidance and forms,” says Kate Cottrell of Bauer Cottrell, citing chapter 4.92.

“But this review of tax guidance – yes another one, is somehow going to take the government 24 months to complete,” Cottrell told ContractorUK. “Sorry, but that’s two whole years.”

At DNS Associates, director Sid Agarwal did some grim reading between the lines.

“This clearly shows that contractors are very low on the priority chain,” he said. “As a result, the contracting industry will continue to suffer, such as from the tainted IR35 reforms.”

'Hunt was more focussed on larger businesses'

Trying to rationalise the absence of support for micro-business, Emily Coltman, chief accountant at FreeAgent, said the chancellor “seems more focussed on larger businesses” and then, “wider macro-economic issues.”

In line with her reading, Hunt vowed fully uncapped tax relief (dubbed ‘full expensing’) for qualifying expenditure, incurred by all companies between April 1st 2023 and March 31st 2026.

While that means limited companies can continue to be able to fully capital expense investments in respect of new IT, plant and equipment, sole traders and partnerships cannot because Budget 2023 makes them ineligible.

'Still waiting for a chancellor who will stand up for contractors'

As FreeAgent’s Coltman delicately put it, Hunt’s help, support and funding appears to be for corporations, cost-of-living or fiscal areas, “rather than what is happening at the lower end of the spectrum.”

Fellow accountant Mr Agarwal, of DNS preferred: “We still wait in this country for a chancellor who will stand up for contractors.”

On LinkedIn last night was a post about avoidance, but its author -- WTT Group’s Graham Webber -- could have been referring to the calls on behalf of contractors going ignored, to chancellor after chancellor at Budget after Budget.

Mr Webber wrote: “We make regular suggestions to HMRC, directly and via MPs and other parties, about how these…[issues] could all be dealt with fairly and simply. Each year we watch the Budget, hoping that one of them may get a mention. Or even be implemented. Or consulted upon. We should know better of course. Budget 2023 = Opportunity Missed.”

Neatly summing up the entirety of Spring Budget 2023 for contractors in just a single term, Olivia Sear, head of compliance at Stonebridge Contracting reflected: “I’m not sure what I was expecting from today’s budget. And maybe Kwarteng’s infamous stint has warped my recollection...But I found it a bit, ‘meh.’”