Today Chancellor George Osborne delivered his 8th Budget and led with a focus on assisting small businesses and building a stronger economy. We were therefore intrigued to hear what announcements he would make to support the UK’s flexible workforce. The Chancellor also stated that he intended to raise a further £12 billion from a crackdown on tax avoidance and evasion so we were keen to review the details behind this to ensure that the genuinely self-employed were not impacted.
After an initial review of the detail published this afternoon we have summarised the key outputs for contractors and the UK’s flexible workforce.
In the run up to the Budget there was a lot of discussion around where the Government will go with IR35 following last summer’s discussion document which sought feedback on a range of proposed changes. Surprisingly, “IR35” was not mentioned specifically in the speech and does not feature in the red book.
Off-payroll public sector working
The Chancellor did however state that public sector organisations will be responsible in ensuring that workers pay the correct tax. The detail in the Budget documents confirmed, under the title “Off-payroll working in the public sector”, that;
“from April 2017 the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies in the public sector. The rules will remain unchanged for those working in the private sector. The government will consult on a clearer and simpler set of tests and online tools.”
It therefore appears the Government are turning their attention once again to the public sector (Government departments, local Government, NHS, schools, BBC and publically owned companies e.g. transport for London) and to recruitment businesses placing contractors within this sector.
Brookson has received a document this afternoon from HMRC entitled “off-payroll working in the public sector: reforming the intermediaries legislation” which contains additional insights into these changes. The document states that from April 2017 it will no longer be the contractor who decides whether IR35 applies but the business which pays the contractor’s limited company (either the end client or more typically the agency). The client or agency will be required to deduct tax at source from all payments made if it believes the contract is captured under the new rules.
This specific targeting of contractors in the public sector is surprising as there are already rules (Treasury Directive issued August 2012) which required the public sector body to seek assurance from certain contractors that they are paying the correct amount of tax. Given today’s announcement it appears as though the current regime is not seen as robust enough to tackle HMRC’s perceived problem with non-compliance within the public sector. We are expecting a consultation on these changes to be announced towards the end of April / early May and will provide further analysis once we receive this.
Our initial view is that contractors working in the private sector will not see any changes to the current IR35 regime and can potentially breathe a sigh of relief (for now).
Positive news for contractors
Despite the challenges presented by the changes above impacting limited company contractors working in the public sector, today’s Budget announcements offered some positive changes which will be of interest to contractors. Some of these are noted below:
- Increase in the income tax personal allowance from £11,000 in 2016-17 to £11,500 in 2017-18.
- Increase in the higher rate tax threshold from £43,000 in 2016-17 to £45,000 in 2017-18.
- Cut in the rate of corporation tax rate from 20% to 17% by 2020.
Two major tax cuts for the oil and gas industry to maximise economic recovery.
- Continued investment in large scale infrastructure projects (green light to Crossrail 2 and High speed 3 between Leeds and Manchester).
In addition to the announcements made today it is also worth remembering 2 significant changes impacting contractors which were announced in the Autumn Statement but that will take effect from 6 April 2016. These are:
- A change to the way dividends are taxed which will impact all limited company contractors. This will reduce the take home pay of most limited company contractors from 6 April 2016; however, limited company working continues to remain the most tax efficient way for contractors to work, providing they manage their IR35 status
- The restriction on tax relief available on expenses incurred by umbrella company employees. The changes previously announced will proceed as expected and umbrella employees who are subject to the supervision, direction or control of their client will no longer be able to claim tax relief on their expenses from 6 April 2016.
With the exception of contractors working within the public sector today’s Budget offered a number of positive measures for the UK’s flexible workforce.
We clearly need more clarity around the proposed changes to the taxation of contractors working in the public sector. Brookson continue to be involved in the consultation process to air its concerns that this change could have unexpected ramifications for the genuinely self-employed. In addition, we feel there will be continued uncertainty regarding the broader reform of IR35 across all sectors and will be keeping a watching brief on this over the coming months.
A detailed summary of today’s announcements by the chancellor can be found in our Budget Summary Guide 2016.