IR35 public sector changes

IR35 public sector changes

If you read our Autumn Statement predictions and review you’ll already have seen us talk a lot about proposed reforms to IR35 from April 2017. In the Autumn Statement, just two weeks ago, it was announced that reforms for contractors working in the public sector would be introduced on 6 April 2017. Yesterday, 5 December 2016, HMRC released their responses to the consultation earlier this year, additional guidance, and the draft legislation.

 

The changes will apply to all payments made on or after 6 April 2017. It’s important to note that this means all payments, even if the work was undertaken before 6 April or the contract agreed before that date.

 

HMRC have effectively created a completely new form of IR35, despite their assurances not to. Public sector work has been entirely excluded from the old IR35 and is now subject to its own specific “son of IR35”, called Chapter 10.

 

Although there is new legislation the actual basis for assessing “employment status” remains unchanged. Therefore if you were outside the old IR35 then you should expect to also be outside “son of IR35”.

 

The chain of supply

The draft legislation recognises the chain of supply, with the worker’s intermediary at the bottom and the end client at the top, defining the parties between in terms of whether they are higher or lower than one another. The party that pays the intermediary will be referred to as the Fee Payer (“FP”).

 

The FP’s responsibilities

The FP will be responsible for determining whether the new rules apply. To help them, the end client will be legally responsible for providing information on employment status to enable the FP to make its assessment. If the end client fails to do so (within 31 days) they will be held accountable and forced to stand in the shoes of the FP.

 

Although the employment status test remains unchanged, there are fears that end clients and FPs will oversimplify the test and take the line of least resistance, assessing many public sector workers as deemed employees subject to the new legislation.

 

Assessing working relationships

The legislation appears to suggest that the contract itself has a greater part to play in the assessment of working relationships. This is different to current thinking in the contracting industry, which suggests that day to day working practices have far more impact on one’s IR35 status than the contract itself.

 

The explanatory notes accompanying the legislation don’t explain this change, and whilst it does not appear there is any intention to rewrite the general employment test, the emphasis on the contract is still unclear.

 

What happens if you are caught within IR35?

The FP will deduct Income Tax and primary National Insurance from the payments made to your company. You may also find deductions from your normal contracted rate for Employers NI and the Apprenticeship Levy, as these will be liabilities the FP must also meet. Whatever happens, the FP won’t be meeting these costs and expect many contracts to be terminated or renegotiated between now and 6 April 2017.

 

In many respects the FP will account for you as an employee and will expect you to provide them with personal tax details. You are required to provide these under the new regulations.

 

The FP will report the income paid to you and the tax deductions alongside its own employees to HMRC. All very confusing because you will be taxed as an employee of the FP, whilst employed and paid by your company, but don’t for one minute expect that being taxed as an employee by the FP gives you any employment rights or rights to statutory payments or pension auto-enrollment. Government has been very careful to avoid assuming those responsibilities on behalf of the public sector.

 

At the end of the contract the FP will issue you a P45 and you will use that to declare your income on your personal tax return.

 

The worker’s responsibilities

The worker will be responsible for providing personal tax details to the FP, such as National Insurance number and tax code. This is particularly important because an emergency tax code would apply if a tax code is not provided.

 

Permitted deductions from the payment amount

The only permitted deductions by the FP will be:

  • VAT included in the payment made
  • Expenses incurred and recovered from the end client (and therefore included in the payment received)
  • Employment expenses incurred by the worker or intermediary

 

How this affects your company

Your company will not have to pay tax on the public sector income assessed as employment income under these new rules, and will be able to claim deductions for capital allowances and pension contributions not previously allowed by the FP.

 

Your company will not need to report any payments made to you personally that have previously been taxed by the FP, but will need to make a repayment claim for tax relief denied by the FP.

 

This is going to make your personal tax and that of the company not just messy but clearly at risk of double taxation. You will need to rely upon advisers that have a very clear understanding of the new legislation, otherwise tax relief may be lost or income taxed twice, especially where you have both public and private sector income.

 

Your company will deal with VAT in the normal way.

 

Intouch and what we are going to do

It’s time for legitimate contractors to have a voice. These proposals were intended to counter avoidance, but the draft legislation will most likely adversely affect legitimate Limited Company contractors. Whilst we have participated at various levels and engaged with HMRC, Government has not listened and has taken a very naïve path in the hope it will get them where they want to be.

 

Intouch will continue to argue the case on behalf of our clients and ensure its services to contractors help ensure their status is correctly assessed and taxed.

 

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.

The 2014 Autumn Statement Review

The 2014 Autumn Statement Review

On Wednesday 3rd December, Chancellor of the Exchequer George Osborne delivered his Autumn Statement, opening with a positive tone on the growth of the economy – achieving 3% vs the 2.7% prediction from earlier in the year, and moving on to cover the falling inflation rate – from 1.5% down to 1.2% alongside falling unemployment rates, with over half a million new jobs having been created this year.

He also stated that the end of the national deficit is in sight, albeit still quite a distance away – with a mission to half the overall deficit by next year. However, despite this positive outlook, he made it clear that there are still many difficult decisions ahead – and plenty of work to be done in order to clear the debt and continue with our economic growth.

What’s the impact for contractors?

Overall it seems that our economy is prospering, but what does this mean for you? There are numerous policy changes which should also have a positive impact on individuals. As promised in our Autumn Statement preview, we’ve gathered some of the key points and changes with the potential to affect contractors in the near future.

Change for Umbrella companies

Changes are on the horizon for Umbrella companies, affecting the contractors working under them. The use of overarching contracts by employment intermediaries and Umbrella companies will be reviewed and the outcome could affect contractors claiming tax relief when travelling to work in temporary locations – something which many of you are reliant upon in order to reduce your expenses. There will be a discussion paper published shortly, so watch out for more news on this topic.

On top of that, the Office of Tax Simplification (OTS) has recommended a halt to tax relief being claimed on reimbursed business when paid in conjunction with a salary sacrifice arrangement. There are a further 51 recommendations on the table from the OTS that the government is considering, details to be published in due course.

The government will also examine the use of Umbrella companies to deprive employees of basic rights, such as being paid the minimum wage.

There are also plans to change the legislation underpinning the penalties for late or non-submission of quarterly returns from employment intermediaries – due to go into effect in April 2015. Regardless of the outcome, it’s clear that Umbrella companies will be under the microscope in the near future.

Income Tax

The personal tax allowance is set to increase again in April next year, with the government announcing an additional £100 increase – bringing the new allowance to £10,600 in 2015. Those earning between £10,600 and £42,385 and therefore liable to pay income tax, will be a welcome £825 better off as a direct result of the increases in allowance between 2010 and 2015.

Clampdown on tax avoidance

Osborne announced new regulations which aim to restrict multinational corporations from avoiding tax. The ‘diverted profits tax’ will mean that companies moving profits abroad will be taxable at 25% by the UK government, putting an end to this method of tax avoidance. Unfortunately for contractors, this change could result in multinationals taking their contracts abroad in an aim to retain their profits – resulting in a reduction in contractor opportunities overall.

Simplification of employee benefits

Following on from its mention in the Budget earlier this year, further changes have emerged surrounding the simplification of the administration involved in employee benefits and expenses. New regulations will mean that, from April 2015, Limited Companies (as well as other employers) will be exempt from reporting on trivial benefits of less than £50. This is welcome news to small businesses, reducing the time and money spent on the administration involved with tax and expenses.

Investment in construction

Government plans include huge investments in infrastructure which is great news for the construction and engineering industry, and is sure to have a positive impact for contractors in the sector – providing an influx of new work and opportunities. Changes to the Construction Industry Scheme (CIS) will also mean a reduction in administrative burdens – allowing construction businesses to operate more freely.

Company loans

For those who have company loans from close companies to individuals, trusts and partnerships, you’ll be pleased to know that there are no planned changed to the tax charges on these.

Pensions flexibility

As announced on 21 July 2014, the new rules on flexible pensions to be effective from 6 April 2015 will continue. These rules allow individuals to take up to 3 small pension pots from non-occupational schemes, or an unlimited number from occupational schemes, of up to £10,000 as a lump sum without being subject to a reduced annual allowance of £10,000. We will also be able to take advantage of these from the age of 55 (reduced from 60) from April 2015.

Support for first time exporters

This year’s Autumn Statement pledged no less than £45m towards supporting businesses looking to expand and develop professional networks abroad. This suggests that the government’s recent commitment to encouraging and enabling the growth of our country’s independent enterprises is actually part of a longer term plan to further support the entrepreneurial spirit of the UK’s contractor workforce.

Although many of these changes will affect individuals differently, depending on personal circumstance, it’s difficult to estimate their real impact until they are implemented. And while the contractor landscape is always uncertain, it’s clear from this year’s Autumn Statement shake-up that change is on the way. New investment and income tax breaks present welcome opportunities to contractors looking to keep their income levels up.

Are you a contractor in need of some money advice? Intouch Accounting are contractor accounting experts, able to provide professional support to Limited Company contractors – leaving you to focus on the matter at hand without needing to worry about your finances.

 

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.

What is the Autumn Statement?

The Autumn Statement 2014

This year’s Autumn Statement is on the horizon, and the UK waits with baited breath as we approach the next phase for our economy and come to terms with what the latest forecasts and action plans mean for us, especially within the contractor sphere. If you’re not sure what the Autumn Statement involves, or what it means for you as a contractor, and need a breakdown of this major event on the economic calendar, we’ve got everything you need to know right here.

What is the Autumn Statement?

At 12:30pm on December 3rd, Chancellor of the Exchequer George Osborne will be bringing the British public its annual Autumn Statement. Here Osborne will address Parliament, providing updates on the Government’s plans for the British economy – using the latest forecasts from the Office for Budget Responsibility (OBR).

These crucial forecasts, known as the Economic and Fiscal Outlook (EFO), are published publicly twice every year, at the Budget and at the Autumn Statement. Put simply, the forecasts take a look at the British economy’s future performance – with this December’s Statement offering insight up to the 2018-19 period.

During the Autumn Statement, the OBR will offer their latest statement on UK economic performance, as well as insight into how the British government is performing against its own fiscal objectives. The Government’s primary objective is to balance its budget – meaning the amount the Government spends on things like welfare and the NHS must be equalled by the amount brought in through taxes.

The Chancellor will also be addressing MPs on the matter of government taxation and illustrating further cuts to public spend – which are, again, based on the OBR’s forecasts. Changes to tax legislation will be introduced – and likely further addressed in the March 2015 Budget – which are necessary to fund the Government’s spending plans.

What does it mean for contractors?

Working on an independent and unfixed basis can feel like your needs are secondary to the permanent contract majority – which is why it’s even more important to keep yourself informed on the Autumn Statement and its implications for you. This is particularly significant in terms of newly introduced tax measures, which will be implemented in order to deliver on the proposed budgets – with anti-avoidance measures proving an especially (and unsurprisingly) hot topic this year.

With contractors looking for a sense of certainty over tax legislation, as well as some pro-enterprise thinking, the 2014 Autumn Statement has the potential to significantly impact on the financial security of contractors and freelancers. Labour and the Conservatives’ recent acknowledgement of the contribution made by temporary workers looks promising – offering a feeling of optimism for contractors who, unsurprisingly, often feel like a lesser government priority.

What can we expect?

Rumours as to what this year’s Autumn Statement will bring include some hopeful speculation on how small businesses may benefit come Wednesday’s big reveal, which is promising for freelancers operating as a limited company. At Intouch Accounting, we can’t stress enough the independence and financial rewards that come with being limited – but there’s no doubt contracting comes with its own set of limitations.

Contractors and freelancers are, of course, familiar with the financial uncertainty of working on a temporary basis. However, predictions for the 2014 Autumn Statement include support for limited companies and contractors, promising greater financial stability and a brighter future for the country’s independent contractors.

Stimulating investment into new businesses – as well as introducing export tax credits to support the exploration of new markets – looks to be on this year’s economic agenda. Last year’s Autumn Statement brought some welcome changes – not least the extension of Small Business Rate Relief – and this year, we’re looking for ongoing government support for temporary workers operating as limited companies.

Automatic late payment charges, for example, would offer contractors a financial safety net in times of untimely payment, while the adoption of an e-invoicing system across the public sector could streamline and secure payment procedures for the future. There’s no telling how Wednesday’s Statement will unfold, but it’s clear that small businesses are very much on the agenda – with contractors set to benefit from the Treasury’s enterprise-oriented legislations.

A reduction on Visa restrictions for skilled independent workers would undoubtedly help to protect the profits of small businesses and allow UK-based companies to attract overseas talent – while National Insurance relief would offer great benefit for small businesses looking to grow quickly and without obstacles.

How can you stay informed?

You can stay up-to-date on Autumn Statement updates by following the HM Treasury on Twitter, or searching the hashtag #AS2014. Better yet, find all the information you need on this important economical event via the Tax Faculty, who’ll be offering a constant feed of updates and insights throughout and following the Autumn Statement.

In addition to posting their immediate (and informed) reactions to the 2014 Autumn Statement on their site, the Tax Faculty will be offering a series of professional responses so you can stay in the loop. These include broadcasting highlights and offering a wealth of expert insights via Twitter, publishing a holistic overview of the Statement the following day, and recording exclusive podcasts over Thursday 4th and Friday 5th December. That way, you can make sure you don’t miss a trick – and guarantee that you know exactly what this year’s Autumn Statement means for you.

Don’t forget to check out our  blog on December 3rd when we’ll be offering a full review of the Autumn Statement – analysing the legislations that affect you, and looking at what the UK’s contractor population can expect in our economic future.

Need more information? The expert contractor accountants at Intouch Accounting have a wealth of financial knowledge, keeping all of your boxes checked and offering professional support when you need it most – get in touch to find out more.

 

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.