Did the cat catch the mouse?
Our Autumn Statement predictions – true or false?
Our predictions – were we correct?
Public Sector IR35 Review
IR35 is certainly the main focus for every Limited Company contractor this Autumn Statement. We predicted that:
- Public sector 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
Were we correct?
The expected announcement, confirming the reform to IR35 within the public sector, was hidden away within the detail of the statement and not announced in the House. From April 2017, Limited Company contractors entering into contracts with a public sector end client will be subject to the new rules. These will include the deduction by the party paying the personal service company (PSC) of income tax and National Insurance (NI). The Government appears to have ignored the cries for delay from both the public sector and the labour supply market.
The statement also announced the loss of the flat 5% allowance when calculating the deemed employment payment. As we feared there are now two forms of IR35, one for the private sector and one for the public sector
We predicted that the recently announced new focus on employment status by the Prime Minister, could lead onto another announcement of further discussion documents or formal consultations into what “worker” and “employment” mean, and whether employment rights should apply to contactors and freelancers. This could then lead onto a final resolution that sees taxation and employment rights finally aligned.
Were we correct?
Further consultations are expected on employment models and the tax advantages gained by each, including incorporation and the self-employed. The statement reinforces previous announcements that mean the self-employed, Umbrella workers and Limited Company contractors can expect further changes during the life of this Parliament.
Last year’s HMRC discussion looked at the role of penalties and interest in achieving compliance. It considered how penalties for non-submission, late submission, late payment and omissions would arise. We predicted that the regime to encourage compliance would likely to be made fairer and be less likely to produce excessive penalties for minor omissions. Therefore persistent defaulters would be punished more severely than the occasional hiccup.
Were we correct?
Sadly the statement was silent on the unfairness and imbalances that arise with the current penalty regime. This was a missed opportunity for the Government to encourage compliance, rather than punitively punish all offenders, regardless of the extent or the amounts involved.
Tax Avoidance Schemes
The problem with tax avoidance schemes is that the contractors who use them tend to be the ones who are penalised when the scheme fails, rather than the promoter that is providing the service in the first place. We predicted that further measures would be put in place to restrict the use of aggressive tax schemes that avoid tax and possibly introduce new penalties payable by providers when their schemes fail.
Were we correct?
Advisers and others that support tax avoidance schemes are now likely to suffer costs arising from the failure of these schemes, to be effective in law. The original consultation was so widely drawn that much of the day-to-day tax advice given to businesses would be caught within the definitions. Let’s hope that the draft legislation is more targeted on aggressive, avoidance rather than merely giving advice that leads to a tax deduction.
Currently set at 20%, Corporation Tax is due to fall to 19% from 1 April 2017 and further to 17% from 1 April 2020. We predicted that Hammond will maintain the fall to 19% come 1 April 2017.
Were we correct?
Corporation Tax cuts announced previously, in earlier Budgets, remain unchanged. Despite comments from George Osborne after Brexit, and some recent rumours, there was no change in the planned reductions that will see CT being brought down from 20% to 17% by 2020
Simplification of tax
We predicted that the Office of Tax Simplification may announce a new company in the form of a Sole Enterprise Protected Assets company (SEPA). We also predicted that they may start taking steps towards the merger or alignment of Income Tax and National Insurance. We hoped to see the “look through company” scrapped.
Were we correct?
Merging income tax and National Insurance has many barriers. The announcement in the Autumn Statement to link both employer and employee contributions to the same thresholds is one step closer. It could have been worse, but confirms the Government’s intention to implement the OTS’ measures over the long term. Again we can expect more as we approach 2020.
The Government has now asked the OTS to look at the VAT system and stamp duty.
Making Tax Digital
The strategy for Making Tax Digital is likely to play a bigger 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 predicted that many of the plans for unincorporated businesses will also be extended to Limited Companies, therefore contractors and freelancers should sit up and be aware of how these changes over the next four years will affect them.
Were we correct?
Several announcements in the written documents support the new measures. Making Tax Digital will start from April 2017, therefore contractors will need to become more aware on a personal front, whilst over the following 3 years further changes will impact them both on a company and personal level.
The recent spate of consultations on MTD will be followed shortly in January 2017, with a formal response from the Government, so you should keep your eyes open for more announcements.
Was anything unexpected announced?
Flat Rate VAT
The Flat Rate VAT scheme is to be modified from 1 April 2017. The changes will introduce a new 16.5% flat rate for limited cost businesses. These are defined as a business that has costs less than 2% of VAT inclusive turnover or, if greater, less than £1,000.
A full definition of relevant expenses has not been provided, but will exclude costs with both personal and business elements, the purchases of capital assets, subsistence costs and motor costs. Whether other employee travel costs in a wider context are included only time will tell. Draft legislation will be issued on 5 December 2016, with a short period of consultation on how the legislation will operate prior to 1 April 2017. The VAT Notice 733 has been reissued and already includes provisions that are deemed to have full legal effect immediately (23 November) to restrict avoidance.
We’ve created a new website tool for you to check how you could be affected – try the calculator now.
The Chancellor announced that this would be the last Autumn Statement. Next year there will be two Budgets, one in the Spring and one later in the year. From 2018 the Budget will be late summer or early Autumn . There will still be twice yearly responses to the fiscal reports of the OBR.
This is good news and will provide two advantages:
- there will be longer between announcements and the beginning of the tax year
- there will only be one principal change to tax law per annum
The tax advantages of providing benefits rather than salary are to be removed. Pensions, child care and cycle to work schemes will be protected, but other forms of salary sacrifice will be subject to the same income tax and National Insurance as an equivalent salary.
Disguised Remuneration and the Self-Employed
The use of some self-employed models to disguise remuneration is now under the microscope in the same way as the public sector was last year. A consultation will take place next year which will include limits on the tax deductions employers can obtain by employers / end clients participating in such schemes.
An employee expense review has been announced to look at the personal income tax relief given for business expenses incurred personally, either reimbursed by the employer or borne by the employee. This could mean that further restrictions are to be expected.
The statement also announced new reviews or consultations affecting the benefits in kind on use of business assets, and the effects of making payments to your company for personal use.
Allowances and Rates
Personal Allowances increase to £11,500, the income tax threshold for the Higher Rate band (40%) increases to £33,500. There are no changes to the Additional Rate limit (£150,000) or the limit from which personal allowances are restricted (£100,000).
Dividend Tax and Nil Rate Dividend Allowance
No changes to dividend tax, or the nil rate dividend allowance.
The NI threshold for both employees and employers becomes £8,164 (£157 per week), with the upper limit increasing to £45,000 (more accurately £866 per tax week). The employment allowance remains fixed at £3,000.
Did any of our wish list come true?
Yes – Employment allowance has been continued
Our wish was – A continuation or even extension of the employment allowance. 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
Yes – Penalties for those who provide tax avoidance schemes, but sadly no expansion on the scope as yet
Our wish was – 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.
Yes – Investments in large scale infrastructure projects
Our wish was – 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.
Yes – Investment to improve productivity, the transport system and broadband will help shore up the economy
Our wish was – Announcements to provide stability in the economy
Pending – The Government has asked the OTS to look at the VAT system and Stamp Duty
Pending – The Government has asked the OTS to look at the VAT system and Stamp Duty Our wish was – 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. Also, cutting VAT to boost consumer spending
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