How Budget 2020 helps and hits the UK’s contractor workforce
As ContractorUK reported yesterday, the main takeaways for PSC contractors of Rishi Sunak’s ‘Getting it Done’ Budget, likely to be dubbed the ‘Coronavirus Budget,’ are:
- The lifetime limit for Entrepreneurs’ Relief reducing from £10m to £1m.
- The go-ahead for private sector IR35 reform / the new off-payroll rules from April 6th.
Experts’ analysis of these two Budget announcements are below. They feature above advisers’ commentary on the chancellor’s other contractor-related announcements, notably:
- A Coronavirus support package that leaves inside-IR35 contractors in the cold.
- Higher starting thresholds for NI, benefitting PAYE and PSC contractors.
- An increase in the weekly Use of Home allowance, benefitting PSC contractors.
- Implementation of the Sir Amyas Morse Review recommendations.
- New legislation to tackle Disguised Remuneration scheme promoters.
- A fresh call for evidence to stamp out DR schemes.
- Beefed up Time To Pay support from HMRC, aimed at “the self-employed.”
- Help for self-employed people who are parents, mortgage applicants, taxpayers.
- A consultation to explore toughening up the Small Business Commissioner.
1. Entrepreneurs’ Relief
Given that IR35 was already scheduled to change from next month (all yesterday’s Budget did is confirm that change), Entrepreneurs’ Relief ought to be the bigger story for PSCs.
And it’s a story that Gareth Wilcox, partner at Opus Restructuring and Insolvency, says was outlined correctly yesterday on ContractorUK.
“For the vast majority of contractors closing their limited company due to IR35 or any other reason, the reduced [ER lifetime] allowance will still be sufficient for them”, he says.
“Since it’s a lifetime limit, some contractors may get stung. But most PSCs I’m helping don’t envisage ‘Ltd’ trading again. The distribution is a ‘one shot’ deal, unlikely to be repeated.”
'If not already planning...'
For directors who do get stung, it means paying CGT at 20%, instead of 10% on the amount over their annual allowance of £12,000, once the lifetime limit had been exceeded.
This is according to Intouch Accounting’s Patrick Gribben, who further advises:
“Contractors should start, if not already planning for their future by having their company make pension contributions on their behalf.
“These reduce the PSC's profit and corporation tax bill by extension, while adding to the director's retirement funds and reducing the amount of retained profit to be distributed in the event of a liquidation.”
But it’s the timing -- more than the tax -- which bothers Clarke Bell. Yesterday afternoon in a statement, the insolvency firm’s co-founder John Bell explained:
“The [measure] is not fair for an entrepreneur who has built up reserves of over £1million, to find out that their ER lifetime allowance has immediately been limited to £1m.
“A fairer approach would have been to say that this new lifetime allowance is eligible for a company that starts trading from today – i.e. the date the new measure comes into place.”
Hayley Simmons, head of insolvency at Shaw Gibbs echoed: “It’s a welcome relief that the chancellor did not abolish Entrepreneurs’ Relief all together. However the changes announced… have already taken effect from midnight last night.”
2. IR35 Reform
The one new piece of IR35 information yesterday relating to the April 6th off-payroll rules came not from the chancellor, nor his Treasury, but from the Office of Budget Responsibility.
In a new policy costings document, the OBR said that partly thanks to PSC directors ceasing trade to benefit from ER, the yield of the IR35 measures should leap by £250m by 2024-25.
The OBR also says that HMT has confirmed to it that Mr Sunak’s pre-Budget vow of HMRC “not going to be at all heavy-handed for the first year” should not affect it new forecast.
“The government have said they will encourage HMRC to take a ‘light-touch’ approach for the first  months”, Matt Fryer of Brookson says of the rules’ ‘soft-landing’.
“However, only time will tell what the full ramifications and unforeseen consequences of this change will be on the flexible workforce -- and the broader UK economy.”
At another contractor accountancy firm DNS Associates, boss Sumit Agarwal says he was waiting on Budget 2020 to detail what the soft-landing would look like. He explained:
“In this Budget and to contractors’ regret, ‘soft-landing’ guidance is missing. We wanted to see what soft landing means in detail; and the differences between abuse and non-abuse.”
But almost regardless of HMRC guidance, if an end-user gets IR35 wrong, it could face a tax and NI bill of 50-60% of the fees paid to the PSC, according to Mark Groom at Deloitte.
“Businesses now have less than a month to complete their preparation for the [April 6] changes,” he said. “Many are nearly there, but those who were hoping for a U-turn….now [need to act]”.
'HMRC has made it clear'
Victoria Kelly, director of operations at Nixon Williams recommended yesterday: “Moving forward, accurate status determinations will be essential.
“End-hirers must prove that they are exercising a reasonable duty of care when making decisions. HMRC has made it clear that blanket determinations do not constitute this.”
Despite this apparent clarity from the Revenue, Graham Jenner of chartered tax advisers Jenner & Co believes that the chancellor should have gone further at Budget 2020.
“The government hasn’t listened to comments about how the [IR35] changes will affect people not [intended by HMT to be] targeted,” he says.
“[The government] still refer to addressing the fundamental unfairness of the non-compliance, but have done nothing to stop blanket bans of PSCs by end-clients. They seem intent on replacing one unfairness with another.”
'Opportunity for contractors'
But a former tax officer who declined to be named for fear of his viewpoint being unpopular, think it’s about time that things changed. Even, he implies, if blanketing is still happening.
“I see the off-payroll working rules as an opportunity for contractors, who have the will and will power, to progress to the next level,” the ex-taxman says.
“Let's face it; it's largely contractors paid via agencies who have been subject to 'blanket bans' and in reality, how can any business progress, when another business can so easily kill it with one board decision? This may prove to be the impetus towards real independence.”
A business adviser to contractors countered: “Sorry, it’s not about fairness of taxation. All it’s about -- for officialdom, is getting more in taxes from low-hanging fruits -- and that’s PSCs.
“If the government was really worried about ‘fairness,’ they would speak up about holiday pay, sick pay and the like and give it to one-person entities, but they don’t. And they didn’t yesterday. To me, it’s like the government is providing a platform for ‘zero rights employment’ to corporate businesses.”
3. Coronavirus-aid leaves IR35-caught contractors in the cold
The chancellor’s £12bn package to help individuals and businesses through the Coronavirus outbreak is multi-layered.
But appearing most relevant to contractors (umbrella and limited), the support package includes:
- Statutory Sick Pay being made available for all those who are advised (by employers or others) to self-isolate, even if they haven’t yet presented with symptoms.
- Refunding any business with fewer than 250 staff for the total cost that business incurs providing SSP to “any employee” off work due to coronavirus, for up to 14 days.
- Helping individuals who are non-eligible for SSP, such as the self-employed, but who are on Contributory Employment and Support Allowance by letting them claim from day one, instead of day eight.
Reflecting on the latter (3.), status advisory ReLegal Consulting says: “Hopefully, the government will address the issue of ‘deemed payments’ at some point soon.
“Because currently, PSC workers ‘inside IR35’ are the only section of the working population that the chancellor did not include in the Covid-19 measures for SSP or the Contributory Employment and Support Allowance for the self-employed.”
'Contractors who have to self-isolate'
Similarly, Off-payroll.org’s James Poyser said: “Contractors who have to self-isolate due to Coronavirus can pay themselves statutory sick pay -- worth £94.25, and reclaim this back from HMRC, most likely via their PSC's payroll. But this doesn't apply to ‘inside IR35’ contractors.”
Contractors operating through PAYE umbrella companies, by contrast, do qualify.
But due to the SSP refunds only being offered to firms with fewer than 250 staff, only smaller umbrellas are likely to action the SSP. Larger umbrellas can action the SSP yet will be barred from the rebate due to having in excess of 250 staff /contractors on their books.
'Little support for large agencies'
Contractor recruitment agencies face the same issue. The Recruitment & Employment Confederation said: “There appears to be little support for business of over 250 employees – this is likely to include temporary workers on the books of recruitment agencies.
“As the chancellor said, the measures that were announced are exceptional and temporary. But businesses are facing long-term challenges, which Coronavirus has made even more acute.”
Accountants MHA MacIntyre Hudson agree, assuming the confederation meant ‘IR35’ by ‘long-term challenges.’
“IR35 has added a sting that impacts whether some businesses will qualify for Coronavirus relief measures,” says MHA partner Bob Trunchion.
“The new rules mean that many medium-sized companies have pre-emptively taken on previously contracted workers as employees, swelling the numbers on their payroll.
“Some will now be too big for reliefs like the sick pay refund, but would have been eligible had IR35 [reform] been delayed. These companies will miss out on any meaningful support but still have all the cashflow risks the virus could prompt.”
4. Higher starting threshold for National Insurance
For contractors who will operate via an umbrella company from April 6th, Budget 2020 announces changes to the NI Primary and Secondary thresholds, points out Chris Mattingly, CEO of The Contractor Co-Operative.
“The effect [of hiking these NICs thresholds] will be widely welcomed,” he says. “A contractor on £500 per day, for example, will take home an additional £115.08 over the course of the year.”
Limited company directors are likely to now be looking at drawing bigger salaries too due to the chancellor’s announcement – the starting threshold for NICs being put up to £9,500 for both employees and the self-employed (from April 6th 2020).
“Ultimately, [this threshold will] increase to £12,500,” says Nixon Williams’ operations director Ms Kelly, referring to the government’s budgetary plans .
“This rise is [going to be] extremely welcomed by both contractors and PAYE employees. The [adjoining] confirmation [by the government] that this will not affect access to state pensions should also alleviate worries for those fearing the tax break could have financial implications in later life.”
5. Increase in Use of Home allowance
Without much explanation as to why, but potentially due to how inadequate it looks in 2020, the weekly, flat-rate deduction for home-working has been increased from £4 to £6.
The timely increase (Google has just told its US staff to work at home due to the Coronavirus), was spotted in the Budget’s small print by Ms Kelly.
She reflected: “While not referenced in the Budget speech itself, the government [used the Red Book to say it] will increase the flat rate claim for working from home from April 2020…[to] £6 per week. This is a positive announcement for many contractors.”
6. (7. and 8.) Loan Charge Review implementation
The chancellor used Budget 2020 to confirm that the government will put into place the bulk of recommendations from the Sir Amyas Morse Review into the 2019 Loan Charge.
That means the forthcoming Finance Bill (due March 19th) will enact measures to make changes to the Loan Charge legislation including to tackle those who market and promote schemes.
But, because the government admitted in yesterday’s Red Book that such schemes are still thriving, a fresh and official call for evidence will be sounded, with a view to eradicating them.
'Loan Charge victims won't be pleased'
Chris James of JSA Accounting said: “[Loan Charge] victims won't be pleased to see that government has acknowledged it still hasn't got to grips with promoters of remuneration schemes that it says don't work.”
And MPs aren’t thrilled either. In fact, the Loan Charge APPG said last night: “Changes to the Loan Charge legislation as laid out in the Treasury response to the Morse Review…aren’t adequate and don’t address the injustice and [we] will push for more.”
To that end, the MPs have secured a meeting on March 19th to debate what they regard as a “flawed compromise that doesn’t resolve the Loan Charge Scandal” – the Morse Review.
Until then, it is falling to individual MPs notably the SNP’s Owen Thompson, to put HMT’s list of Loan Charge actions yesterday (made at Budget 2.255/256), into context.
Attending a Budget 2020 debate, Mr Thompson reminded the government: “Not one single promoter so far of a loan scheme has been prosecuted while countless individuals who were simply following advice and guidance available at the time are left ruined”.
The Loan Charge APPG confirmed: “The situation remains that those who promoted, sold and recommended schemes now subject to the Loan Charge are not being made to pay a penny, while those they promoted sold and recommended them to are facing ruin. [It’s] a huge injustice”.
9. Time To Pay boost
As part of his package to help SMEs amid the Coronavirus outbreak, the chancellor said HMRC is going to “scale up” its TTP service so the self-employed (and other businesses) can defer tax payments.
During his speech, Mr Sunak also said that the beefed up service to pay tax over an agreed period of time would require 2,000 staff at HMRC “standing ready to help.”
Accountants at McIntyre Hudson were less gung-ho, describing the HMRC service announcement simply as an “upgrade.”
Nonetheless, the tax firm says that unlike some of the chancellor’s other COVID-19 measures, the Time To Pay scale-up “does benefit everyone.”
The coronavirus TTP helpline number is 0800 0159 559, and is an addition to other HMRC phone contact numbers. An HMRC webpage further clarifies that the staff provision is “up to” 2,000 call handlers.
Also according to the Revenue, late payment penalties and interest will be waived for traders who experience “administrative difficulties” contacting the tax office or paying taxes due to Coronavirus.
10. (and 11.) Self-employment support
Eagle-eyed insurer Dinghy spotted that Budget 2020’s small print offers a three-tier package to the self-employed, which Rishi Sunak neglected to mention in his speech.
But the entire package is positive and part of it indicates that the government is “still committed to tackling the issue of late payment,” the firm says.
In particular, a BEIS consultation will launch on the “merits of” strengthening the powers of the Small Business Commissioner.
'Hard to reach'
There will also be a new interactive HMRC tool to make it easier for business soloists to “navigate” the tax system (launches this summer); an exploration on bettering the guidance for mortgage applicants who are self-employed, plus a pledge to examine how to provide “appropriate support” to self-employed parents.
Individuals who work for themselves “in rural and hard to reach areas” are also told in the Red Book that they will likely benefit from a £5billion commitment by the chancellor to rollout gigabit-capable broadband.
Mr Sunak had further good news in his Red Book for spirit drinkers, wine drinkers, cider drinkers, beer drinkers -- and drivers, as all alcohol duties -- like fuel duty, has been frozen.