The Autumn Statement 2016 – our predictions for Limited Company contractors
We reveal our top predictions for Limited Company contractors for this year’s Autumn Statement, and share our wish lists of what we’d like to see announced.
The Autumn Statement is just around the corner, and with lots of uncertainty surrounding what to expect, we decided to share our predictions on the key areas that affect Limited Company contractors.
Thoughts from Duncan Strike – Director of Intouch
This year’s Autumn Statement is on Wednesday 23 November. Although there has been some talk of abolishing the event or returning to a more limited scope, we can expect this year’s to follow the normal format.
“The Financial Times reports that whilst Hammond will be delivering the Autumn Statement as planned on 23 November, the Chancellor is said to have told colleagues he wants to move away from gimmicks and micromanagement, and return the Autumn Statement’s focus on fiscal forecasting.
Former Chancellor, Alistair Darling, told the newspaper he had also planned to scale back the Autumn Statement, but needed both the Budget and the Autumn Statement to cope with the fallout of the financial crisis.”
What is the Autumn Statement?
The Autumn Statement is a smaller version of the March Budget, and kicks off with a speech from the Chancellor of the Exchequer telling Parliament what is happening with the economy and how the Government plans to manage it over the next year
In recent years, there hasn’t been much difference between the Autumn Statement and the Budget, except that the Autumn Statement often appears to be less weighty, with fewer announcements. Changes that are announced have tended to be focused on specific areas that are only applicable to certain groups.
We often see new consultations in advance of the Budget or proposed, draft legislation that will be introduced at the Budget. However, there is rarely a clear insight into what will follow in the Budget four months later.
In the past, the Autumn Statement has also been used to announce the immediate start date from which urgent legislation, to counter tax avoidance, will be applied.
What will the main focus be?
Following the Brexit vote, we can expect this year’s statement to be particularly focused on the economy, with reports on where the public finances are, as well as measures to protect the UK from any negative aspects of the vote to leave.
We can also expect to see announcements of large scale infrastructure investment and other stimulants to the economy, including a weakening over control on the budget objectives to allow for measures that protect our economy.
“Prime Minister Theresa May and Hammond have repeatedly stressed that the Government’s target to clear the UK’s budget deficit by 2020 will be put on ice (though not abandoned) as the UK tries to deal with divorcing from Europe. So, extreme tax changes or benefit cuts shouldn’t be on the cards when Hammond takes to the despatch box in November.”
What can we expect from GBP?
The recent falls in sterling are adding inflationary pressures in the UK, and we can expect some measures intended to protect sterling.
However, a fall in sterling has increased the value of stocks and shares which could lead to hidden benefits to the UK economy, especially for investors, though sadly global profits are rarely taxed in the UK and are unlikely to add to the UK’s war chest.
The likelihood of invoking Brexit in February must be on the minds of the legislators and so measures associated with Brexit must be expected.
Public sector IR35 review
It would be great to see an announcement to shelve plans that introduce a second level of IR35 for the public sector. HMRC are already falling behind on their plans for this to be introduced in April next year and their digital tool to help assess status is far from even being tested.
There is general opposition to the proposals that would force the party that pays a Limited Company contractor to assess IR35 status and then deduct tax and NI before paying the company. If these rules proceed to become law it will create a two tier IR35, making life very difficult for any contractor wishing to work in the public sector.
Intouch submitted a detailed response to the consultation and continue to work towards convincing HMRC of its folly.
What are our predictions for IR35?.
We believe that the key areas affecting contractors who provide services within the public sector, that were set out in the consultation document, will be announced on the 23rd.
- Limited Company contractors’ IR35 status’ will become the responsibility of the party that pays them
- It is this party’s responsibility to calculate, report and pay the relevant taxes.
- If found inside IR35, contractors’ Limited Companies will suffer National Insurance (NIC) and income tax deducted at source via PAYE. The deduction will be made from their gross fees with only the net paid to the company
- The party deducting the tax and NI will pay HMRC
- HMRC’s digital tool will provide a real-time assessment on whether IR35 applies. This is an assessment which the party should rely on, but is not final
- If HMRC believes the assessing party has falsified information to ‘sway’ the online tool’s IR35 status decision, then they too can also be liable for unpaid tax and NICs.
- Should a contractor disagree with their IR35 status, they can appeal via a Tax Tribunal
The new laws will be implemented in April 2017.
The Intouch wish list
That the whole proposal for reform of IR35 in the public sector is abandoned, with the Government announcing instead a widespread properly financed attack, under tax avoidance legislation, against all of the contractor tax schemes that are designed to profit the provider or the agency, at the expense of the worker.
Employment status – another bite of the apple
The Government has once again refocused on the “gig economy” and freelancing, alongside Limited Company contracting, with further plans to look at what shape “employment” and “worker” will take and mean in the future. Despite previous attempts by the Government and the Office for Tax Simplification (OTS) to consider changes that reflect the current array of work practices and models, no one seems to have been able to get a serious and practical grip to date
The new focus, announced by the Prime Minister recently, could lead to an announcement of further discussion documents or formal consultations into what “worker” and “employment” mean, and whether employment rights should apply to contractors and freelancers. Employments rights and employment tax have always been two sides of the same coin. Perhaps this would lead to a final resolution that sees taxation and employment rights finally aligned.
Intouch would like the Government to finally make a decision to align employment law with employment taxes, and set out a clear strategy on what is a “worker” and “employment” that reflects the needs of the flexible workforce and the economy, rather than only the potential tax take.
Last year HMRC issued a discussion looking at the role of penalties and interest in achieving compliance. The consultation considered the four areas where a tax penalty could arise: nonsubmission, late submission, late payment and omissions. This covers all taxes, including Corporation Tax, PAYE, Self Assessment and VAT.
The HMRC discussion considered how penalties should be applied and the extent to which the rules should be drawn up to encourage compliance, rather than punish a misdemeanour, and to what extent they could be considered fair.
The discussion highlighted the different methods of determining whether a penalty should apply and how it is calculated for all the relevant taxes. It found that there were serious inconsistencies and no consideration of the taxpayer’s general compliance record. This meant a person wholly compliant in all areas, but filing a return late, could be punished in the same way as a persistent defaulter
The regime to encourage compliance is likely to be made fairer and less likely to produce excessive penalties for minor omissions. This won’t mean that persistent defaulters will get away scot free, with measures that punish persistency more severely, rather than the occasional hiccup.
We would like to see HMRC forgiving minor offences, with 1st and 2nd time offenders being given a warning rather than a penalty. This is across all taxes, rather than just one specific area. Those who continually offend (say after their 3rd or 4th offence in a twelve month period) should then go on to be penalised.
We also believe that the offences should be considered across all taxes, to give a greater sense of compliance with the law.
Taking a wider view of compliance and allowing taxpayers the chance to learn from their mistakes will encourage Limited Company contractors to comply with the rules surrounding tax, rather than waiting for HMRC to kick them once they’re down.
Tax Avoidance Schemes
Tax avoidance schemes are popping up everywhere, especially since the restriction on expenses for Umbrella workers. Many contractors are offered offshore employment models, loans and other models that offer the opportunity to take home more money.
Whilst tempting, and although tax avoidance schemes are not illegal, they often do not work and can leave you footing the bill to HMRC, even when you’ve been led to believe that your service provider has been legitimately setting money aside on your behalf
The problem of course is that any promoter can claim a scheme works and suffers no loss when the scheme fails. Government plans to reinforce anti tax avoidance legislation, to impose penalties on promoters of schemes that fail in an attempt to curtail the actions of the more dubious promoters. Earlier this year a consultation proposed such changes, but also went potentially further by not clearly defining what a scheme is. This could be prejudicial against all forms of planning, and not just the aggressive, marketed schemes.
We expect to see further measures to restrict the use of aggressive tax schemes that avoid tax and possibly to introduce new penalties payable by providers when their schemes fail.
We believe it’s grossly unfair that the contractor is the only one who is penalised when using a tax avoidance scheme, especially when many are not even aware they are doing so at the time!
We’d like to see penalties applied to those companies who provide such services, rather than just those who are found to be using them. But we hope the Government will be sensible and clearly define the nature of schemes that should be caught, and not apply a broad base that has unforeseen or unintended consequences.
Currently set at 20%, Corporation Tax (CT) is due to fall to 19% from 1 April 2017 and further to 17% from 1 April 2020.
Following Brexit, comments were made that CT could fall to a record low of 15%, to encourage the economy and to show the rest of the world that the UK is still ‘open for business’.
George Osborne was a fan of reducing CT to 15%, but his successor, Philip Hammond will most likely look to keep the current plans unchanged.
At this year’s Conservative Party conference in Birmingham back on 3 October, Mr Hammond said that, “At 20 per cent, we have a highly competitive Corporation Tax rate, and as it falls to 17 per cent over the next three years, it will be more attractive still.”
Whilst Hammond is not going to announce the same 15% tax rate as Osborne may have done come 23 November, we do predict that he will maintain the fall to 19% come 1 April 2017.
Whilst we can dream alongside Limited Company contractors for a CT of 15%, we know this is not going to happen!
What we would like to see is an acceleration of the previously announced reductions to 17%, to help the economy reach its desired position quicker. We believe this would be a good move by Hammond, especially following Brexit.
Simplification of Taxation
Simplification of the tax system has been a subject of discussion for several years, and each year measures are introduced that attempt to make tax simpler to understand and comply with. Sadly, measures to simplify the system are often countered by new tax rules that are introduced. Overall the net effect is neutral, with tax remaining as complex and unfathomable as ever for many small businesses.
Several recent recommendations have been made that look at the small company and whether today’s commercial landscape calls for a new type of company.
- The OTS suggested several types of new company that could be considered, but the one that perhaps may find its way into law is the Sole Enterprise Protected Assets company (SEPA). This is a company that is taxed as an individual but with protection for the taxpayer’s personal assets.
- Hopefully the “look through company”, where the shareholders are taxed on company profits, will be wholly consigned to the rubbish tip, as it is a poorly considered answer to a more complex issue.
- Whatever recommendations the OTS and Government decide to adopt, Intouch hopes that contractors won’t be forced into a corner and allow contractors to make a voluntary decision
- Another area that the Government and the OTS has been looking at is the merger or alignment of Income Tax and National Insurance. Any changes would be immensely complicated, and here at Intouch we doubt much will happen before 2020. However, we could see some small steps towards the bigger objective at any stage over the next few years.
We would like to see a reduction in the reporting requirements for small companies, with exemptions from the intermediaries reporting regime.
Making Tax Digital
Six consultations were released in July aimed at discussion on the Government’s Making Tax Digital plans. The strategy is likely to play a greater part in future Autumn Statements and Budgets as measures are put in place to achieve the desired plan, including quarterly reporting and payments of tax. We expect an announcement may be made in the Autumn Statement or Budget, we’re just not sure which one.
What was made clearer by the consultation process is that many of the plans for unincorporated businesses will also be extended to Limited Companies. Freelancers and contractors should begin to sit up and become aware of how these changes programmed for the next 4 years will affect them.
Hopefully consultations specifically aimed at companies will be forthcoming quickly enough for the proposals to be fully considered and adapted into practical solutions.
- That the whole proposal for reform of IR35 in the public sector is abandoned, with Government announcing instead a widespread properly financed attack, under tax avoidance legislation, on all contractor tax schemes that are designed to profit the provider or the agency at the expense of the worker. At the very least a delay in public sector IR35 for 12 months to give time for HMRC to get the digital tool right. It must be fully considered, tested and adapted into practical situations.
- A continuation or even extension of the employment allowance would be attractive. This incentive has always been considered a temporary measure, and it would be very attractive were it placed on a more permanent basis for small businesses to attract greater employment. We see no reason why IR35 workers or single director worker companies should be potentially excluded from this allowance.
- The penalty regime is severe for Limited Company contractors that don’t have the support of a specialist accountant and fall foul of the complexity of tax rules. Many contractors make honest mistakes, especially in the early years, and we would like to see a fairer penalty regime that both supported the pathway to compliance and reflected the size and nature of the oversights that might occur.
- That penalties are applied to those companies who provide tax avoidance services, and not just the contractor who (possibly unknowingly) uses them. We hope the Government will clearly define the nature of these schemes that should be caught, and not apply a broad base that has unforeseen or unintended consequences.
- It would be great to see a reduction in Corporation Tax to 17% earlier than planned. But it’s Dividend Tax we would really like to see reduced. The new tax effective from April 2016 has been a severe hit to some contractors, especially at the margins of higher rate tax. We would like to see some guarantee that the Dividend Tax will remain static (although reduced would be preferred) for the next five years
- Investment in large scale infrastructure projects often leads to greater demands for contractors. We hope that the statement will announce such projects to stimulate the economy and hopefully the contracting sector will see benefits from a general upturn as a result.
- Introducing a voluntary new form of company along the lines of SEPA, would be welcome for those Umbrella or IR35 workers that seek an easy and cost-effective solution. Many Umbrella workers feel abused by their providers and would be attracted to the opportunity for a simple form of company to fit their needs.
- Tax cuts in Capital Gains and stamp duty in a bid to boost the economy. These could all contribute to raising productivity, growth and investments.
- Cutting VAT to boost consumer spending.
- Announcements to provide stability in the economy.
Whilst there’s been a lot of unanswered questions surrounding the Autumn Statement and what it will hold for contractors, we believe that the main focus will be on Brexit. It’s Mr Hammond’s chance to regain some confidence and tell a positive story, and he will use this opportunity to show Europe that the UK is strong and doesn’t need the EU to achieve greatness.
Infrastructure will be high on the agenda, with money being spent on transport, housing and digital. Whilst the introduction of the changes to IR35 will mean a period of adjustment for public sector contractors, the extra funding in transport will mean good news for Limited Company contractors who travel frequently.
What are your predictions for the Statement?
We’ve shared ours, now why not share yours? We’d love to hear your thoughts on what the Autumn Statement will hold for Limited Company contractors.
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Were we correct?
Keep an eye out for our review of the Autumn Statement on 24 November. In it we will detail what Mr Hammond really had in store for contractors and what it means moving forward
Have you found our predictions useful?
Why not share it with your contracting colleagues? If you’d like us to send them our Autumn Statement review on the 24th, simply leave us their email address and we’ll make sure they get one.