Contractors may be entitled to feel a little cautious optimism following the release of the detailed initial agreement that our new Conservative and Liberal Democrat coalition government plan to work under. First details are starting to emerge about tax, regulation and the economy, from which it appears that Cameron and Clegg have adopted an approach designed to stimulate economic growth, reduce spending and avoid swingeing tax rises.
This is all positive for contractors, but clearly the jury is out until the emergency budget is held within the next 48 days. Once that has taken place, the precise tax and financial implications for contractors will be provided by ContractorCalculator’s updated online interactive calculators.
IR35 and tax avoidance
No firm stance has yet been agreed on IR35, but it is notable that before the election the Liberal Democrats had promised to repeal IR35, whilst the Conservatives had said it would be reviewed as part of an overall review of small business taxation.
The coalition agreement states that the Liberal Democrat proposals for tackling tax avoidance will be developed in detail, but no further information is forthcoming yet. Whether the overstretched HMRC will be able to cope with additional legislation when it does not have the resources to implement and police the powers it already has is questionable.
And although tackling tax avoidance will go a long way to raising the additional revenues the new government so desperately needs, picking off contractors using IR35 is almost certainly not an effective use of HMRC inspectors’ time when there are ‘much bigger fish to fry’.
Public sector contracting – winners and losers
With tackling the UK’s enormous deficit a priority for the coalition, public sector spending will undoubtedly be cut, and £6billion of “accelerated” spending cuts have already been promised. In addition, there is to be a review of departmental spending in the autumn, which will almost certainly lead to further cuts. This could all have a major negative impact on contractors across most disciplines and sectors, for whom the burgeoning public sector has proved a profitable source of contracts for the past decade.
What we do already know is that the national identity card and biometric passports schemes will be scrapped. This is likely to be a blow to the IT contracting teams that have been focusing on these projects.
Engineering and construction contractors will be disappointed with the news that there will be no new runways built at Heathrow, Gatwick or Stansted, although there is better news in a commitment to expand the UK’s high-speed rail network.
And there is other more positive news for contractors who support the NHS and its massive infrastructure. Despite Vince Cable arguing that NHS spending should not be ringfenced, the coalition government has promised it will rise in real terms every year of the Parliament.
It also seems possible that, with the UK military involved in high-profile conflicts abroad and the ConLib coalition saying that Trident will proceed, the promised strategic defence review might bring more welcome news for contractors.
Energy sector contractors to benefit
Despite energy security having slipped under the radar of the election campaign, all the major parties had indicated that investment in energy would be a post-election priority. And the new coalition has wasted no time in confirming this.
There are a number of new government initiatives on the cards that could provide opportunities for contractors in the energy sector. These include green investment projects, which will be of direct benefit to contractors of all disciplines who operate in the renewable technologies and sustainable energy sectors.
Where the Tories and LibDems have agreed to disagree is over nuclear power, which the Conservatives wish to invest in and the LibDems do not. The Tories have pledged to promote replacement of existing plants, which should provide a host of opportunities for engineering, construction, IT and other contractors.
The Scottish Parliament has been promised more powers under the Calman Commission proposals, and there is a possibility that this might have some impact on oil, gas and energy contractors in Scotland’s offshore sector. However, the likelihood is that energy policy will remain a ‘reserved subject’ under the power of Westminster.
Emergency budget
The promised emergency budget will introduce a deficit-reduction plan, although £6billion of “accelerated” spending cuts have already been promised. The emergency budget will also provide details of the new independent Office for Budget Responsibility, which is to be tasked with growth and borrowing forecasting.
No firm stance has yet been agreed on IR35, but it is notable that before the election the Liberal Democrats had promised to repeal IR35, whilst the Conservatives had said it would be reviewed as part of an overall review of small business taxation
Labour’s planned 1% increase in National Insurance Contributions (NICs) will not be entirely scrapped, despite it being referred to by Prime Minister Cameron throughout the election campaign as “a tax on jobs”. Any NICs increases are likely to hit contractors, particularly those who run their own limited companies and therefore have to pay both employers and employees NICs.
A new ministerial committee is to be set up to look into structural banking reform. Plus, a new tax on financial transactions and a clampdown on "unacceptable" bonuses have been promised. It is unclear what all this might mean in practice, but anything that makes the City of London less attractive to the global finance and banking community could threaten the UK’s single largest market for IT and other contractors.
Capital Gains Tax to rise
Capital Gains Tax has been identified as a candidate for increase, ‘taxing non-business capital gains at rates similar or close to those applied to income’ is the official wording, although contractors with growth plans for their business will receive the ‘generous exemptions’ planned for entrepreneurs.
The LibDem manifesto pledge to increase the personal allowance to £10,000 appears to have been honoured by the coalition team, although the exact timetable of implementation is somewhat hazy, and it seems changes will be phased in over years, not months.
Pension ages are set to increase to 66 with the gradual abolition of the default retirement age and no compulsory annualisation at the age of 75. In addition, public sector pensions will be reviewed.
Legislation, regulation and Europe
The political partners plan to limit the impact of the Working Time Directive and consider introducing laws that protect the UK’s sovereignty, but there is no mention yet of repealing or amending the scope of the Agency Workers Regulations (AWR).
Reducing red tape is an avowed target of the new administration and plans to simplify the incorporation process will certainly benefit new contractors or those switching from other trading vehicles to a contractor limited company.
The signs are largely positive for contractors, but it’s very early days and the UK is entering uncharted territory so there is plenty of scope for disappointment. However, not just one but both of the parties which have committed to take some positive action about IR35 and the plight of contractors are now in power so the future is positive and real change may yet be on the cards.