The Chancellor of the Exchequer, Philip Hammond, has today presented his first and last Spring Budget. With this being the last Budget to take place in the Spring, many commentators expected the measures announced to be relatively low key.
The Chancellor opened his Budget 2017 speech by talking about “record employment”. Let us not forget that it’s the 4.8 million strong self-employed workforce which has been crucial in delivering this. The flexibility of the UK labour market continues to makes it an attractive place to do business and it is this flexibility that has been crucial to recent economic recovery, allowing firms to hire quickly or tailor their staff levels to meet customer needs. Despite recent measures to collect more tax from this evolving flexible labour market, I was eager to hear what announcements would be made today to recognise and support the UK’s flexible workforce, particularly given the need for our economy to remain resilient as we start our withdrawal from the EU.
What was announced in today’s Budget?
Having initially referenced the importance of the self-employed workforce the UK economy (the first time I can recall a Chancellor making reference to this in recent times), the Chancellor then announced that the tax they pay was not fair when compared with that of an employee.
The measures announced in the Budget to tackle this are twofold:
- For unincorporated businesses (sole traders) the rate of Class 4 NIC will increase from 9% to 10% in April 2018 and to 11% from April 2019.
- For contractors working through a limited company the dividend allowance will be reduced from £5,000 per shareholder to £2,000 per shareholder from April 2018.
These measures will reduce the take home pay for sole traders, partnerships and limited company contractors from April 2018. Initially, this sounds like bad news but if this means that the Government are comfortable that this will raise sufficient revenue to remove the need to extend the IR35 changes being felt in the public sector into the private sector then I think this is a fair outcome, particularly when you also consider the forthcoming reductions in the rate of corporation tax.
I would hope that as the Government have now tackled false self-employment, travel and subsistence expenses, IR35 compliance in the public sector, abuse of the flat rate VAT scheme and tinkered with tax rates for the self-employed and limited company contractors it is time to leave the sector alone for the foreseeable future to get on with continuing to add value to the economy.
Having reviewed the detail behind the announcement there was nothing further of significance which will impact those working within the flexible labour market. One comment buried on the documentation which is of interest referenced abuse of the employment allowance. “HMRC is actively monitoring National Insurance Employment Allowance compliance following reports of some businesses using avoidance schemes to avoid paying the correct amount of NICs. The government will consider taking further action in the event that this avoidance continues.” We are aware of some umbrella companies misusing this allowance to try to gain a tax advantage so welcome this activity but hope that any measures introduced to counter this don’t impact the genuinely self-employed.
It is also worth remembering that there are several pre-announced changes to the tax system due to take effect from April 2017 which are not contractor-friendly.
IR35 Reform in the Public Sector
This change impacts contractors working in the public sector. From 6 April 2017 all public sector bodies will be responsible for determining the IR35 status of any limited company contractors providing service to them. The business which makes payment to the limited company (end client or agency) will then be responsible for ensuring that PAYE is withheld from payments made to any limited companies who fall inside IR35 – based on the public sector bodies conclusion.
We have produced a blog on this topic which provides an overview of the changes and some practical advice for contractors impacted by it.
Contractors working in the private sector will not see any changes to the current IR35 regime.
The government will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as contractor limited companies. Currently, businesses determine which flat rate percentage to use by reference to their trade sector. HMRC have changed this so that a FRV rate of 16.5% will apply to a contractor business (with limited costs).
We are disappointed by this change as it is appeared to be targeting the abuse of the FRV scheme in certain sectors where a limited company is used solely for the purpose of accessing the FRV benefit for a worker who is caught by IR35 e.g. teachers. However, genuine contractors across all market sectors will be impacted and appear to be being asked to foot the bill for non-compliance.
We have produced some further guidance on this topic, including some advice for contractors to reconsider their VAT status in light of this change.
Tax Rates and Allowances
We welcome the Government’s commitment to reducing corporation tax rates in the UK to 17% by 2020, with a reduction from 20% to 19% being effective from 1 April 2017. This will benefit genuine contractors, as will on-going increases to the personal allowance and higher rate tax threshold enabling contractors to retain additional money whilst income tax rates remain stable.
For more detailed information on changes to tax allowances and other specific tax measures announced today, Brookson have published a Budget 2017 Summary guide.
Budget 2017 Summary
Unfortunately, there is not much in the way of positive announcements to support the flexible workforce. Whilst I am pleased to see the government taking some action from April 2017 to tackle non-compliant working practices in the flexible labour market I am disappointed that the measures being brought in will financially impact genuine contractors.
I do take some comfort from the Chancellor finally acknowledging the positive impact that the flexible labour market has and is having on the UK economy. We have seen much tinkering with the tax rules within the sector over recent years and I do hope that we are now entering a period of stability. I think whether this transpires or not will be dependent upon the output of the Matthew Taylor review on modern working practises, due for publication in the summer.
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