Where does the ‘Budget for the future’ leave contractors now?

The Budget for the future?

It was billed as the Budget for the next generation, promising to offer long-term solutions to long-term problems. But what do Osborne’s plans mean specifically for contractors and freelancers?

 

After a weekend of media speculation, we tuned in at 12:30 today to find out exactly what the Chancellor had packed in the Red Box. Now we know. Here Intouch Accounting Director Duncan Strike, who is well used to unpicking the implications behind the announcements, identifies the three most important announcements affecting Limited Company contractors.

 

1. Personal service companies and the public sector

What transpired today was the announcement of a consultation that specifically targets contractors working through their own Limited Company for public sector bodies (including teachers and NHS workers).

 

In essence, if the consultation proceeds, this means:

 

  • the public sector body or agency paying the personal service company (PSC) must assess ‘employment status’
  • HMRC will provide ‘simplified tools’ for this purpose.

 

Furthermore, where employment status is found:

 

  • the fee due to the PSC, excluding VAT, will be reduced by 5%, then
  • Income Tax and Employee’s NI will be calculated and deducted before the PSC is paid
  • the PSC will no longer be responsible for Employer’s National Insurance (NI); this will be met by the client or agency
  • the combined deductions from the PSC and the Employer’s NI will be paid by the client or agency.

 

The proposed treatment of Employer’s NI is inconsistent with existing IR35 rules and it’s a wonder how this will be addressed in the final legislation. However, the principle of passing the Employer’s NI liability to the client or agency appears fair and likely to result in a proper consideration of status. Most consultations lead to legislation; it is reasonable to consider these changes will occur in substantially the way proposed.

 

It’s also likely that this or a separate consultation will look at IR35 further and in particular seek a simplified means of assessing status. We’ll be watching this space very carefully and reporting as the situation emerges and develops, as well as taking part in the debate.

 

2. Disguised remuneration and tax avoidance

For many years’ promoters of tax avoidance have offered tax schemes using Employee Benefit Trusts and loans to avoid Income Tax and NI. HMRC are to be given new rules that enable them to cancel out the tax advantage and possibly tax existing loans, remaining outstanding on 5 April 2019, in what might be considered a clever way of backdating the legislation. Contractors having used such schemes should be wary and prepare to consider the full effect as proposals develop into law.

 

3. Directors loans

The new dividend tax effective on 6 April 2016 means that dividends falling in the higher rate band will be taxed at up to 32.5%. Some commentators had identified that taking loans from your company may have offered a cheaper (tax) alternative.

 

The Chancellor has clearly identified this too and has now increased the tax on loans to directors or shareholders, taken from your company from 6 April 2016, to the same 32.5%..

 

Read more about the new dividends tax in our full ebrief.

 

We’ll be releasing our full Budget analysis tomorrow, specifically to help contractors and freelancers make sense of Osborne’s announcements. While we apply our expertise, tell us your initial thoughts about the Budget that Osborne believes puts family and future generations first.

 

Has George done enough to support small business owners? Share your reaction by leaving us a comment.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.