Where contractors win and lose at Spring Statement 2018
PSCs who wanted certainty about last year’s IR35 changes in the public sector potentially being extended to the private sector are losers of Spring Statement (SS) 2018.
There was no mention of IR35 in chancellor Philip Hammond’s statement, nor alongside it.
There is a new online Hansard page however, referred to by a Treasury spokesperson who ContractoUK approached.
It reveals that the IR35 consultation is due “in the coming months.”
The wording on that page is reproduced below. Other SS announcements able to affect contractors follow -- also in bullet points and also in the government’s own words. Except for the Off-Payroll section (covered here and here), analysis and expert reaction are beneath the bullets.
1. Off-payroll working
- In the coming months, the government will publish a consultation on how to tackle non-compliance in the private sector, drawing on the experience of the public sector reform.
- The government will work with businesses and individuals to mitigate the potential administrative burdens of any future changes.
2. VAT registration threshold
- A call for evidence to explore whether the design of the VAT threshold could better incentivise growth.
- The current design of the VAT registration threshold may be dis-incentivising small businesses from growing their business and improving their productivity.
- This was noted by the Office of Tax Simplification in their review of VAT published last year, which recommended that the government examine the current approach to the VAT threshold.
- This call for evidence will explore the effect of the current threshold on small businesses, and will then go on to consider different policy options.
“If this did ultimately lead to a drop in the VAT threshold, it would cause serious cash-flow problems for many self-employed people,” says Chris Bryce, chief executive of IPSE, who called it a “nightmare scenario” for one-person business.
He added: “They would quickly face the stark choice of either raising their prices – causing them to lose customers – or absorbing the cost themselves, which would do significant damage to their businesses.”
Tax body the ATT agrees. “[We hope this call for evidence] will make the Treasury aware that the negative impacts on small businesses of simply reducing the VAT threshold will be exaggerated by the imminent introduction of digital record keeping and reporting requirements, and Brexit.”
The ATT’s Yvette Nunn enforced: “Although reducing the VAT threshold would appear to be a simpler solution, it would result in unwelcome added costs and burdens for small businesses who suddenly find themselves above the VAT threshold”.
However David Whiscombe, a tax partner at BKL, points out that there is some sound reasoning behind the evidence-call.
“The consultation about VAT registration threshold is the main point of interest [in the Spring Statement] for limited companies or, at least, those companies that are not registered for VAT.
“[It’s necessary because] it’s not clear how commonly such companies are at the moment turning away potentially profitable work in order to avoid the need to get involved with VAT registration,” he said.
Making VAT rules less complex, “easier to apply, in the expectation that it should lead to less uncertainty among business, and fewer disputes with HMRC,” would all be welcome, achievable results, the Chartered Institute of Taxation says.
“There is a strong case for some kind of smoothing mechanism to reduce the financial and administration impacts of the [VAT] threshold,” the institute added.
“It is crucial that any such mechanisms are simple for business people to understand and operate. There may also be a case for refreshing or extending the VAT Flat Rate Scheme.”
Go Simple, an online accounting platform for contractors, sounds glad that the broad issue of the Value Added Tax threshold is to be scrutinised. Although it has reservations as well.
“How this will eventually affect contractors remains to be seen,” said Go Simple’s director Amanda Swales, who urged contractors to complete the Treasury’s 7-minute online survey .
“Any moves to simplify VAT collection and submission will be welcomed by those earning over £85,000, although Making Tax Digital -- which comes into force for VAT from 2019 -- is supposed to be addressing this already.
“As such, we’ll have to keep a close eye on this consultation to see whether the recommendations that come out of it help or hinder independent professionals and small businesses.”
Another contractor accounting solution, FreeAgent, said potential changes as a result of the consultation could afford businesses a longer period after their turnover turns eligible for VAT registration.
They could also benefit by having a simplified VAT accounting procedure, for a certain level above the threshold -- which is currently not scheduled to change for two years from April 1st 2018.
3. Late payment
- A call for evidence on how to eliminate the continuing scourge of late payments to small businesses.
Although not currently outlined by the government online, this official call for evidence on late payments was regarded yesterday as the chancellor’s response to the Carillion crisis, which contractors and sub-contractors are still reeling from.
“The chancellor has recognised in the wake of the Carillion collapse that the blight of late payment to suppliers is still part of business culture, and that small firms are being driven to the wall because of it,” says Tim Stovold, head of tax at accountants Kingston Smith.
The Federation of Small Businesses (FSB) reflected: “The collapse of Carillion highlighted the dangers of the UK’s pernicious poor payment culture. We need to create an environment where another Carillion can’t happen.”
The federation was referring to the 120-day payment terms that Carillion had in place – which, before its collapse, prompted recruiter Reed to stop supplying the company with freelance, temporary and contract professionals.
“Late payments are an ongoing blight on the self-employed,” reflected IPSE’s My Bryce.
“It is highly welcome that alongside the office of the Small Business Commissioner, the chancellor will also be consulting on other ways of stopping late and even non-payment by clients.”
As to existing ways to deter the two, Kingston Smith reminded that since April 2017, large businesses have been obliged to disclose the proportion of bills which are paid within 30 days; between 30 and 60 days -- or after 60 days.
Mr Stovold said: “Suppliers should challenge buyers who breach their own terms and should use the published data to give themselves advance warning of whether they are dealing with a business that will be slow to pay.”
Further help for the out-of-pocket could emerge once the government gets around to analysing responses to its call for evidence (which is yet to receive a deadline).
FreeAgent’s chief accountant Emily Coltman said: “This could [eventually] be a boon to anyone who is struggling to collect payments from customers.”
4. Self-funded, work-related training
- A consultation on the extension of tax relief for training by employees and the self-employed to support upskilling and retraining.
- The consultation will explore how to design an extension to the existing tax relief that focuses on supporting good quality training for those wanting to upskill or retrain, particularly those who want or need to change career.
- It will also explore how to design an extension that prevents misuse on recreational activities; is sustainable for the public finances, and is simple to understand and administer. Successful tax deduction models for training in other countries will be examined.
“The training consultation looks at first glance as if it might benefit contractors until you realise that the position for employer-provided training -- which includes training organised by a contractor operating through his or her company -- already benefits from good tax breaks,” said BKL’s David Whiscombe
“This consultation is really looking at how to remove the differentials between this sort of training and similar costs incurred either -- first; direct by employees or second; by self-employed individuals…. [therefore] it’s not likely to affect the typical contractor who operates via a company.”
So it is the wider community of people who work for themselves who stand to benefit by being aligned – in terms of tax deductibility rules – with their incorporated counterparts, when it comes to professional development.
“Not only is it unjust that self-employed people don’t have the same relief for training as employees; our research has also shown that lack of access to training is also one of the biggest factors holding back struggling, vulnerable self-employed people,” says IPSE, which single-handedly campaigned on the issue.
The Institute of Directors also backed the training consultation. “We welcome government’s acknowledgment in the chancellor’s Spring Statement that a broader, simpler, compliance-friendly tax relief to encourage individuals to undertake training which will directly benefit the UK economy is necessary.”
However the IoD’s Stephen Herring then cautioned: “Hopefully, the outcome of the consultation will provide a sufficiently generous but focussed new tax relief for those individuals who do not already benefit from courses provided by their employers.”
Herring’s latter comment points to the fact that umbrella company contractors could finally be put on a par with their PSC counterparts who benefit from a more generous, flexible regime for getting tax relief when they up-skill.
“The consultation offers the prospect of levelling the playing field,” reflected Mr Whiscombe, “so that relief will be due by reference to the character of the training -- rather than the structure through which it is provided. [It] is to be welcomed.”
5. Entrepreneurs’ Relief on pre-dilution gains
- A consultation seeking views on changes to Entrepreneurs’ Relief to ensure that it does not discourage entrepreneurs from seeking external finance for their companies.
Although broad-sounding, the consultation explores an issue that would be relevant to contractors only where a shareholder is diluted down below 5% by raising outside (typically VC) investment, accountants say.
6. Digital economy
- The government will explore how online platforms could work with HMRC and taxpayers to help people who make money through the platforms understand and meet their tax obligations.
In taking aim at people who sell over digital platforms (rather than the people who design the platforms), the government seems keen to explore the role that platforms could play in achieving their users’ tax compliance.
The consultation will explore “the relationships between platforms and their users and the steps some platforms are already taking to help their users understand and meet tax obligations." It also outlines some measures taken by overseas tax authorities and seeks evidence of their impact.
- A call for evidence on the role of cash and payments in the digital economy.
- Making sure the economy is fit for the future and keeps pace with how people pay for goods and services will be a focus.
- Ways the government can support digital payments; smooth transition from cash to digital, and still crackdown on those using cash to evade tax and launder money, will be the priorties.
- A second "position paper" has been published on how HMRC ought to respond to digital businesses that generate value in unique ways, but whose modern arrangements challenge the traditional corporation tax system.
Simon Wax, partner at accountants Buzzacott LLP, said it was “concerning” for growing businesses that the government was building on the idea of a revenue-based tax for digital companies.
“The government has recognised the potentially negative consequences of this move for start-ups and has proposed some measures such as a significant de-minimus revenue level,” he said.
“However, whatever system is eventually implemented, it is likely to catch out unsuspecting start-ups. The consultation with industry is ongoing and SMEs should make sure they input into this review to make their voice heard against protests from large tech businesses.”
The FSB sounded similarly concerned, saying: “Any new tax on multi-national digital corporations can’t be allowed to impact on small firms who are already trying to compete in a sector dominated by big players.”
7. On The Road
- A consultation to reduce VED rates for the cleanest vans
To woo “the Great British White Van driver” (who he recently angered with his aborted plan to raise Class 4 NICs), the chancellor wants to back ‘going green’ by cutting the road tax on vans.
“This is something that will definitely be of interest to contractors in the trades,” reflected Go Simple’s Amanda Swales. “This [comes] on top of eight years of consecutive frozen fuel duties [and Mr Hammond’s] continued commitment to keep transport costs low”.
- Publication of £1.5bn in allocations for Brexit preparation funding for 2018/19.
A recycled commitment from No.11 Downing Street yesterday was to “continue prepare for all eventualities” when it comes to the UK exiting the EU.
It's not the sort of announcement on Brexit that FreeAgent’s boss Ed Molyneux, a former freelancer, had in mind.
He said: “I would have liked to hear the chancellor provide some detail about how freelancers and micro-businesses can be protected from any negative economic fallout from Brexit.”
9. Knowledge-intensive companies
- A consultation on creating a fund structure within the Enterprise Investment Scheme for investment in innovative knowledge-intensive companies.
- It seeks views on possible elements and constraints of such a fund structure, while also seeking to better understand the capital requirements of innovative knowledge-intensive companies.
The tweak to the EIS was not the sort of support that Buzzacott’s Simon Wax wanted from Mr Hammond, a former businessman, for those enterprises showing high-growth potential.
“The increase in R&D tax credits announced in the Autumn Statement only applies to large companies, and it is disappointing that the chancellor has not increased the amount received by start-ups.”
“Given that R&D Tax Credits can help start-ups to bring their idea to market, fast -- and that can make all the difference in the current climate,” he said, “this is a disappointing omission.”
10. Dividend tax
Although it too failed to win a mention in the chancellor’s Spring Statement yesterday, the dividend allowance is being cut from £5,000 to £2,000 on April 6th 2018.
It means that if you receive dividends over your allowance, basic rate taxpayers are taxed at 7.5% on the excess, higher rate taxpayers at 32.5% and additional rate taxpayers at 38.1%.
In a guidance note to affected parties last night, Hargreaves Lansdown offered advice to soften the blow of the dividend tax, suggesting that the prudent ought to consider adopting it amid the not ruled out -- “possibility of further cuts to the allowance.”