Budget 2017: how contractors are affected
Contractors who use the tax-free dividend allowance are the biggest losers of Budget 2017, as reported yesterday and today, because their £5,000 waiver will fall to £2,000 from next April.
The relevant Budget chapter is reproduced below. That reproduction appears after new developments about IR35 (the rule inspired a HMRC paper yesterday), and above other announcements affecting contractors.
Budget announcements affecting such professional workers’ personal finances are covered separately on ContractorUK today by an independent financial adviser, Contractor Financials.
The Intermediaries legislation did not feature in Budget 2017, except for updated estimates of how much extra tax revenue reforming it for the public sector will raise for the exchequer.
Qdos isn’t surprised at the omission. “We weren’t expecting earth-shattering announcements on IR35, as the off-payroll legislation has been drafted and explained beforehand.
“Neither were we expecting the chancellor to say that the off-payroll rules would be extended to the private sector next year,” the firm said.
‘No appetite for private sector rollout’
HMRC must at least trial the rules in the public sector first, explains Qdos’ Andy Vessey, and also “parliament currently has no appetite” for such an extension, he said.
But there were still IR35 developments yesterday. In a new policy paper on the off-payroll rules, released next to Budget 2017, HMRC revealed that just 30,000 PSCs will be affected.
It also said that, from April 6th and in light of feedback, it will be “optional” for recruiters or public bodies to take account of a contractor’s expenses when calculating the tax due.
‘Ongoing costs, not just a one-off’
Last night, a staffing body took issue with the government’s follow-up claim that businesses affected by the reforms -- such as recruiters -- will face “one-off” transitional costs.
“In reality, costs will be ongoing,” said APSCo, which also noted the paper warning that smaller agencies may be “disproportionately affected” by the costs of the reforms.
Yet Qdos’ Seb Maley always knew the rules would go ahead. “That Philip Hammond chose to ignore the calls to delay 6th April’s changes to IR35 in the public sector isn’t a surprise.”
“Given the genuine concern over the effectiveness and accuracy of HMRC’s new IR35 tool however, there’s very little time or room for mistakes when setting public sector contractor’s IR35 status -- which is concerning.”
In an about-turn on the Revenue’s stance on the tool, NHS finance managers say that tax officials have told them the department will not always stand by the decision that it issues.
Until now, the opposite has been understood -- that except for where answers are fraudulently inputted, HMRC would abide by the determination that the tool reaches.
An agency who was briefed by the NHS finance managers believes that the Revenue’s change of heart may be due to an unexpectedly high number of ‘outside’ results being issued.
ESS ‘issues’ (continued)
The disclosure coincides with claims that the digital tool’s results are at odds with the verdicts in 21 IR35 tribunal cases, if the PSC working practices in each are entered. HMRC has reportedly rubbished the claims.
ContractorUK also understands that an HMRC official has admitted to “issues” with the tool’s question 5, on Substitution, which is asked before traditionally more determinative factors like Control.
The Association of Recruitment Consultancies, which has launched a legal challenge against the lawfulness of the tool (the Employment Status Service), kept up its misgivings yesterday.
“Both the genesis of the tool, given there was no consultation on whether there should be particular reliance on an online tool in the first place, and now its results, appear to fall significantly short,” it said. “We believe the IR35 public sector proposition is indelibly unsound.”
Others are still aghast at the tool’s timing. Andy Hallett, commercial director at SThree, an agency that supplies contractors to the public sector, said: “The time to release the ESS was three months ago, not four weeks before [its] go live [date].”
(Budget 2017, 3.6 states:)
- The tax-free dividend allowance will be reduced from £5,000 to £2,000 from April 2018
- This will reduce the tax differential between the employed and self-employed on the one hand and those working through a company on the other, and raise revenue to invest in our public services
- It will ensure that support for investors is more effectively targeted, and make the total amount of income they can receive tax-free fairer and more affordable.
Different Forms of Remuneration
(Budget 2017, 3.7 states:)
- The government is considering how the tax system could be made fairer and more coherent, including by looking at the taxation of benefits in kind, employee expenses [and accommodation benefits].
According to the Budget’s small print, BIKs will be the subject of a call for evidence, as will employee expenses, while a consultation will launch on accommodation benefits.
The three-fold scrutiny (much of it surfaced in Autumn Statement 2016) was hinted at by the chancellor in his speech yesterday when he said. “People doing similar work for similar wages and enjoying similar state benefits [should] pay similar levels of tax.”
The Association of Professional Staffing Companies (APSCo), whose member agencies place IT contractors, is “disappointed” that an actual review into how different workers are taxed was not launched.
More concerning, said APSCo, is that Mr Hammond indicated in his speech that the “preliminary thoughts” of Matthew Taylor’s modern employment practices review perceive individuals to be tax-motivated.
“In the professional sector this is simply not the case,” the association said.
“These are bona fide business-to-business relationships where the individual has no guarantee of continuity of assignments, has genuine business risk and liability -- and none of the benefits enjoyed by permanent employees.”
The Freelancer and Contractor Services Association moved to set the record straight too. “The chancellor stated that tax should not be the main driver for the mechanism in which people choose to work but [he] clearly believes it is.
“However, evidence suggests otherwise,” FCSA said. “Research [from the government’s own business department entitled] ‘Understanding Self-Employment 2016’ found that only 1% of over 2,500 respondents cited tax as the main reason for choosing self-employment.”
Obviously not convinced, Mr Hammond said he would raise Class 4 NICs for sole trading freelancers from 9% currently to 10% next year, and then 11% from 2019.
The move directly breaks a 2015 Tory manifesto pledge not to raise NICs. And it will add almost £1,000 to some traders’ tax bills, pocketing the government some £145m by 2021.
(Budget 2017, 3.42)
The chancellor announced a £820milion anti-avoidance package to
- stop businesses from converting capital losses into trading losses
- tackle abuse of foreign pension schemes
- introduce UK VAT on roaming telecoms services outside the EU
- enforce from July a “tough” new financial penalty for accountants who enable a tax avoidance arrangement that is later defeated by HMRC
- raise £115m over five years from this enabler provision -- “wishful thinking” according to HMRC dispute specialists WTT Consulting
- keep targeting disguised remuneration by the self-employed to raise £640m (up from £630m at Autumn Statement 2016).
(Budget 2017, 3.48)
To combat tax evasion, the government used Budget 2017 to say it will:
- Consult on how to combat missing trader VAT fraud
- Call for evidence on a technology-enabled VAT collection mechanism for online sales by overseas traders.
Making Tax Digital
(Budget 2017, 3.39)
Hailed by Mr Hammond as one of his three new commitments to the business community, the chancellor said he would postpone by 12 months the MTD scheme for certain taxpayers.
For PSCs, the delay means no ‘at least’ quarterly online updates for their corporation tax obligations until April 2020, although they must be made by April 2019 if VAT-registered.
Reactions last night ranged from “a win-win result” and a “welcome relaxation to small businesses,” to others saying the delay “does not go far enough”.
The chancellor said: “In a digital age, it is right that we develop a digital tax system.
“But in response to concerns about the timetable expressed by business organisations, and by several of my Right Honourable Friends including the Chairman of the Treasury Select Committee.
“I have decided that for businesses with turnover below the VAT registration threshold I will delay by one year the introduction of quarterly reporting at a cost to the Exchequer of £280 million.”
Then, taking aim at online retailers, Mr Hammond said he wants to “find a better way” of including virtual businesses (with no commercial premises) in the business rates system.
For IT, the technology industry or technological advancement, Budget 2017 says the government will:
- Bring forward measures to boost R&D by lightening the relief’s admin burdens
- Allocate £300m to support the “brightest and the best research talent,” including support for 1,000 new PhD places and fellowships, focused on STEM subjects
- Approve £270m to “keep the UK at the forefront” of disruptive technologies like biotech, robotic systems and driverless vehicles
- Invest £16m in a new 5G mobile technology hub, and establish a 5G expertise centre within government, involving public and private partners. “Premature,” says the IoD
- Give £200m to local projects to leverage private sector investment in full-fibre broadband networks
- Introduce 'T-levels,' qualifications aimed at boosting uptake of technical education
- Boost by over 50% the number of hours training for 16-19-year-old technical students, including a “high-quality” 3-month work placement for every student
- Invest an additional £500m a year in 16-19-year-olds, once the placement programme is rolled-out
- Offer maintenance loans to the brightest students who go on to undertake higher level technical qualifications at new Institutes of Technology and National Colleges
- Forge ahead with the Apprenticeship Levy, designed to support the delivery of 3m apprenticeship starts by 2020.
Other Budget 2017 announcements potentially affecting contractors include:
- A rise in April in the registration threshold for VAT to £85,000 (up from £83K now)
- A rise in the deregistration threshold for VAT to £83,000 (up from £81K now)
- An injection of £90m for the North and £23m for the Midlands to address pinch-points on the national road network
- The publication of a discussion paper exploring how to maximise exploitation of remaining reserves for North Sea Oil and Gas
- An increase to the entry and exit threshold on the ‘cash basis’ accounting scheme, plus make simplifications to aid working out whether expenditure is tax-deductible
- Uplifting the National Living Wage to £7.50 per hour
- Providing £5m to help people back into “employment” after a career break.