Contracting’s stakeholders are disappointed, but unsurprised with the announcement that clients of contractors operating in the public sector are due to assume responsibility for determining the contractor’s IR35 status.
The latest move in the Government’s efforts to clampdown on ‘tax avoidance’ is expected to generate an additional £12bn in tax, and marked possibly the only black spot on an otherwise uneventful afternoon as Chancellor George Osborne delivered the 2016 Budget.
“In every Budget I have given action against tax evasion and avoidance that has contributed to the repair of our country’s finances,” claimed the Chancellor.
On a more positive note, the Chancellor also announced another reduction in Corporation Tax, tax cuts for the UK’s struggling oil and gas sector, and the commissioning of numerous infrastructure projects.
Nine out of ten contractors supposedly non-compliant
“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 Government will consult on a clearer and simpler set of tests and online tools,” reads Section 2.40 of the Red Book.
This confirmation comes after a widely reported pre-Budget leak claimed 90% of contractors are ignoring the rules. Reports also suggested that existing tests would be replaced by an evaluation of supervision, direction or control (SDC), although this was not confirmed within the Budget.
ContractorCalculator CEO Dave Chaplin disputes these statistics, citing a 2014 Treasury review of the tax status of public sector contractors which determined 94% of all off-payroll contracts to be legitimate, adding: “Where the Government has come up with the 90% non-compliance figure is anyone’s guess.”
Is the Government ‘testing the waters’ with latest measure?
The Red Book states that the current rules are set to remain unchanged for contractors in the private sector. However, Chaplin is concerned that the Government may just be testing the waters before attempting to implement the strategy on a wider scale:
“The Government seems quite keen to test out the idea of clients enforcing IR35. Despite the Treasury’s warnings that it would prove too much of a burden, I’m concerned that the Government has decided to test the measure on itself. If it works, we could see it being rolled out to the private sector.”
According to Chris Bryce, chief executive of the Association of Independent Professionals and the Self Employed (IPSE), HMRC has offered its assurance that the new rules won’t apply to the private sector. Despite these assurances, Bryce warns of the detrimental impact the measure could have on the public sector:
"If the rules aren’t clear or implemented properly there’s a huge risk of discouraging specialist contractors from lending their expertise to the efficient running of public services and the delivery of large-scale projects.”
Government policy a result of misconception
For Crawford Temple, chief executive of contracting trade body PRISM, this latest announcement to come out of Westminster highlights the Government’s lack of understanding of the contracting sector:
“The country's growing army of contractors will continue to suffer the worst of both worlds. They are treated as 'employees' by the taxman despite identifying more with the self-employed in the way they choose to work. It is important to remember these are people with no job security who lack the same access to support, benefits and pensions available to ordinary employees.”
"Whilst the Chancellor spoke clearly about his mission to back small businesses he is determined to penalise contractors by clamping down on Personal Service Companies (PSCs), assuming that those working in this way are tax evaders and avoiders,” notes Freelancer and Contractor Services Association CEO Julia Kermode. “We must redress the balance and change the perception that all temporary workers are avoiding paying tax.”
Budget ‘a missed opportunity’ for the Government
On a more positive note, the majority of contractors and self-employed came out of the Budget better off than expected, benefitting from various perks offered by the Chancellor. Corporation Tax is due to be lowered to 17% by April 2020, whilst every contractor’s tax-free allowance will rise to £11,500 by April 2017.
Meanwhile, contractors may also be able to take advantage of two new £1,000 allowances for property and trading income. But despite these positive announcements, FreeAgent CEO Ed Molyneux believes the Chancellor has missed an opportunity to benefit contractors in more practical ways:
“There’s very little information about how the Government actually plans to make tax simpler for self-employed people, or if it plans to follow through on any ideas put forth by the Office of Tax Simplification (OTS) other than a closer alignment of income tax and NI contributions.”
Engineers and construction contractors to benefit from announcements
Engineering and construction contractors look to be amongst the primary beneficiaries of this year’s Budget, after the Chancellor outlined numerous infrastructure projects across the UK.
“We’re making the Northern Powerhouse a reality and rebalancing our country,” claimed Osborne, after announcing that the Government is to give the go-ahead to the High Speed 3 (HS3) rail links. Additionally, the Government will also commission Crossrail 2. These and other projects look set to result in a wide range of contract opportunities.
Pleas from oil and gas sector stakeholders were also listened to, as the Chancellor announced the supplementary charge for the sector is to be cut from 20% to 10%. The petroleum revenue tax will also be abolished, in a bid to stimulate exploration and investment. If successful, the measures should offer contractors within the sector a welcome boost.
Umbrella travel and subsistence restrictions to go-ahead
However, concerns remain over the availability of contractors to carry out the new roles. Plans to restrict tax relief on travel and subsistence expenses for contractors engaged via an intermediary, and the public sector changes, may both impact contractor availability.
“There is no question that we will see a skills shortage as fewer workers will be willing to travel for assignments,” notes Kermode, who identifies HS3 and Crossrail 2 as projects that are likely to be affected.
“Pushing on with large-scale infrastructure projects will significantly increase UK productivity,” adds Bryce. “The Government must be aware of the problems changes to public sector rules for PSCs will have on delivering these projects.”
According to Temple, this represents a huge oversight by the Chancellor: “Mr Osborne is pressing on with the changes without any attempt to more fully understand the structures used by modern businesses in their engagement of workers. This will push up costs for some public sector employers as well as reducing the flexibility of the workforce."
Contrasting views on Lifetime ISA
Whilst there was no more news on the pensions front, the Chancellor did announce the creation of a new “generous and completely flexible” Lifetime ISA. The Lifetime ISA will be available from April 2017 to anybody under the age of 40.
The Government will put in £1 for every £4 invested by the holder, who can invest up to £4,000 each year. Users can access their funds at any time for a small charge and won’t be taxed upon withdrawal.
Although the Government encourages using the Lifetime ISA as a pension pot, Graham Fishwick of Contractor Wealth explains that this won’t be an option for the majority of contractors:
“I wouldn’t expect a lot of contractors to make use of the Lifetime ISA. The tax breaks aren’t really there for contractors with regards to pensions. Contractors tend to pay into their pensions gross, via their limited company, but they won’t be able to contribute to an ISA in this fashion.”
However, as Bryce notes, the Lifetime ISA could make for a sound investment for contractors with uncertain workloads: “When you’re self-employed your income can fluctuate. The Lifetime ISA enables more self-employed to save for the future, something IPSE called for ahead of the last election.”