Darling shuts down contractor tax schemes
IT contractors are collateral victims of yesterday's Budget, as although they were not the chancellor's prime target, some may need to change how they operate from today.
That's because their advisors were right to say that while Alistair Darling's pre-election Budget would strive not to "lose votes", it would also not ignore taxpayers ducking their 'fair share.'
Cue "Protecting Tax Revenues," a press notice released alongside the Budget statement which announces attacks on payroll and offshore "schemes" that exploit several tax "loopholes."
The notice, from Her Majesty's Treasury says: "The government is taking further action to change the game for those seeking to bend or break the rules on tax."
To this end, legislation will be made from April 6, 2011, to stop businesses using Employee Benefit Trusts to make 'disguised payments' of remuneration to trustees.
Ray McMahon, a tax advisor at consultant365.com, added: "There has been an increase in these schemes, which offer increased take-home pay by various methods, over the recent years.
"It appears 'disguised payments' is an area the government wants to tackle. Businesses have just over 12 months to consider whether to continue with these schemes".
According to the notice, the government says it will take action on trusts and "other vehicles" used to reward employees, where income from employment is not taxed correctly.
Simon Dolan, of SJD Accountancy, said: "This Budget shows how intent the chancellor is to shut down avoidance schemes, which many contractors have been caught up in."
Mr Darling is equally determined to hit people not paying tax on offshore income or gains, SJD said, given yesterday's promise of tougher penalties from HM Revenue & Customs .
McMahon explains: "Where people have moved their money 'offshore,' HMRC will consider settlements with tax geared penalties which could be increased up to 150% or even 200% of the liability".
In a related move, and in line with BN66, the government says it will stop companies from claiming "excessive" tax relief for foreign taxes by "abuse" of the UK's double taxation treaties.
To do this, the government will deploy a package of new measures from April 1, 2010, that will include "principles-based approaches to protect Exchequer revenues."
The same Treasury notice reveals a further clampdown on another type of scheme advertised to contractors as a way they can maximise their take-home pay, said Bauer & Cottrell.
The notice warns of "a measure countering avoidance involving the release of loans to participators by close companies [so]...close companies will be denied a corporation tax deduction for releases or write-offs of loans to participators."
Until now, where a loan was made to a participator and subsequently written off, a reduction against corporation tax could be claimed, explained ex-Revenue inspector Kate Cottrell.
But the legislation produced by the government will target "a number of 'solutions' for contractors" that hinge upon loans being used in this way, she said.
"This [legislation] comes into force from today," warned McMahon, also a former tax inspector.
"[It will apply] where a director takes a loan from the company and then it is written off. Although there was a benefit and NICs to pay, it was considerably less than having to pay off the original loan."
Coupled with the incoming action on double tax treaties, the fact that Budget 2010 dictates write-off loans are now fully taxable confirms that the government remains "serious" about tax avoidance, said Dolan.
Pointing to the Treasury notice, he added: "There are quite a few significant moves in the Budget to attack contractors who might be thinking about using offshore schemes."
Taken together, the department's package of avoidance and evasion measures is expected to raise an extra £1.5billion, while ensuring a further £4bn of tax receipts by 2012-13.
While some will deduce that 'every little helps' in shoring up the UK's balance sheet, which shows full-year borrowing of £167bn, this multi-pronged tax clampdown came in a Budget that was, on balance, comparatively business-friendly.
The Time to Pay facility, which lets businesses pay the taxman on a timetable which they can afford, got the all-clear for five years, or the whole of the next parliament.
Martin Hesketh, of accountancy firm Brookson said: "The Budget was quite friendly to business in terms of small and medium-sized enterprises, but it wasn't particularly great for freelance or contractor companies.
"That said, the measure that seems directly to benefit contractors is the extension of the Time to Pay scheme, assuming contractors are in trouble with cashflow and need extra time to pay."
He added that while the business community would generally embrace the extension, it was also helpful to HMRC, as "getting the tax payment delayed is preferential to starting proceedings to recover it."
Reassuringly for one-person companies worried about their employment status, such proceedings yesterday appeared to have slipped down the Revenue's agenda.
In an HMRC document concerning audits and inspections, the tax authority says it has re-engineered its Employer Compliance Review process, which is the usual route for an IR35 investigation.
"HMRC say that they are on target to reduce audits and inspections by 15% by 2011," reflected Bauer & Cottrell.
"This is all clearly in line with the marked reduction in investigation work and IR35 cases over the last 18 months."
But any celebrating of 'efficiency' by contractors in the IT industry, the age-old target of IR35 investigations, is likely to be short-lived if they plan to supply the public sector.
According to the Budget, spending on government IT and computer programmes will be cut by £500million by 2012-13, though the precise targets remain unclear.
"On the whole, it appears most of the savings will be made by tightening up on the way departments and agencies work with existing IT suppliers," says Georgina O'Toole, analyst at TechMarketView.
"[In other words], getting 'more for less' or in some cases 'less for less', or by the scaling back of programme objectives, as opposed to radical cancellations of major programmes, at least for the next couple of years."
The state's revised IT spending plan reveals the Ministry of Defence will save £130m by replacing legacy IT systems, and the NHS will save £100m by "taking a new approach" to NPfIT.
Another saving - of £80million - will be seen at the Home Office thanks to a 20% cut in IT spending, which includes £40m realised from re-negotiating existing contracts for basic IT services.
Likewise, spending on IT services at the Department for Work and Pensions will fall by £180m; at Revenue & Customs it will fall by "over £100m," while at DEFRA "some IT projects" will simply be cancelled.
The incoming round of spending cuts in the public sector extends to IT consultancy services which, combined with cuts to marketing/communications budgets for consultancy, should return £650m.
Yet positively for affected IT consultants and consultancies, central departments will publish contracting and sub-contracting opportunities on a single website from December 2010.
The free-to-access portal will reflect the onus on departments to make more use of small businesses, and to make department contracts more fitting to them.
Anne Redston, visiting Professor of Taxation at King's College, said: "Increasing the number of public contracts awarded to small and medium-sized business to 15% of all contracts is probably helpful."
And having secured a contract, an IT supplier should encounter few delays being paid for their goods or services, as all departments will "aim to pay 80% of all undisputed invoices within five days," the Budget says.
If they have plant or machinery costs, some of those suppliers might be able to benefit from the chancellor's decision to double the Annual Investment Allowance, from £50,000 to £100,000.
A similar doubling of the threshold, from £1m to £2m, was announced from next month on entrepreneurs' lifetime relief allowance against capital gains tax, which Mr Darling held steady at 18%.
The Federation of Small Businesses, which called for the relief in 2008, yesterday hoped: "Proposals to increase the threshold to £2 million should see serial entrepreneurship rise."
More people being successful in self-employment must also be the goal of the government's plan to "personalise" businesslink.gov.uk, and improve the accessibility of its guidance for start-up companies.
Further encouragement to 'go it alone' is in a plan to offer a single interactive form, so businesses can register for multiple taxes online, and authorise tax agents.
Moreover, for all small or medium-sized businesses, a growth incentive stems from a new £45bn commitment for additional lending from the state-controlled banks Lloyds and RBS.
Meanwhile, an increase in the threshold for VAT might usher in entrepreneurs worried about red tape, and a business rate relief scheme for an estimated 345,000 firms should appeal to their more established peers.
"All of theses announced moves for enterprise, assuming they come to pass and are effective, are encouraging for small and medium-sized businesses," said Hesketh.
"These businesses might now become more attractive to contractors, and at the same time the businesses might be more able to engage contractors, if they qualify for these measured treats."
Mike Berry, managing director of Xchangeteam, a recruitment agency, agreed: "The chancellor has signalled his intent to help the small to medium sized businesses...with a range of measures designed to improve cash flow and reward entrepreneurial achievement.
"This will help improve the jobs market in the creative and media sector as many of the companies in this sector are in the small to medium-sized category.
"We have already seen signs that those companies who reacted well to the recession are actively recruiting both freelance and permanent candidates and the steps taken by the chancellor will speed that process."
Perhaps the most inspiring Budget announcement in the eyes of candidates on the recruiter's books for video game placements is a new tax relief scheme for the sector.
According to the Budget Red Book, the government will introduce a computer games scheme modelled on the tax incentives previously given to help the UK film industry, subject to approval.
Welcoming the government's pledge, the National Endowment for Science, Technology and the Arts, said: "Tax relief offers the UK videogames industry a much needed shot in the arm."
Chief executive Jonathan Kestenbaum added: "It will help restore the sector to its world-class position, but only if it goes hand in hand with encouraging the development of intellectual property and finding new forms of finance'.
In line with the call for better exploitation of IP, the government said it was working with a group of universities with the goal of monetising intellectual property from their research.
More immediately, legislation will be introduced this year to abolish the condition requiring that any IP from Research and Development be owned by the company making the claim.
Although first announced in the pre-Budget report in December, the recycled pledge represents "good news for contractors who wish to protect their own IP," said McMahon.
However arguably, and given the devilish detail of previous Budgets, the best news for contractors is that "the government has seemingly done nothing to harm us" in Budget 2010, said the PCG.
In fact, in all the Budget's 71 notices, and in all the supporting press notices, there is not a single mention of 'income-shifting,' the family business tax, dispensations or umbrella companies.
'False self-employment' in the construction industry does feature, albeit briefly and only to reiterate that the government is committed to tackling the problem with "a legislative solution."
Hesketh said: "These issues - 'income shifting,' umbrella company dispensations and 'false self-employment' - are still on the government's agenda, but are not visible now because of the political circumstances it finds itself in."
Dolan confirmed: "In terms of one-person limited companies not being mentioned, there just isn't any new anti-position the government can take because of the political climate. The government needs to be seen to be helping small businesses."
All the tax advisors CUK spoke to agreed that the measures in the PBR, including the 50p higher rate of income tax, the phasing out of personal allowances, the cap on pension contributions and a higher NI rate, were more relevant to contractors than the Budget itself.
"We will now go back and revisit these tax changes for affected customers," Brookson said.
"Overall, there was not a lot of negative announcements for contractors in the Budget - corporation tax rates aren't increasing any further, income tax is the same, VAT is not changing. To this extent, the positive of the Budget is that there's no new negatives."
But for one freelance IT contractor, the absence of unwanted measures in Budget 2010 isn't a cause for popping champagne corks.
"There was no change to corporation tax rates, and no concrete proposals for how a percentage of government work will go to smaller businesses," he said. "All in all, from the one-person business perspective, nothing of any value."