Chancellor Alistair Darling’s Pre-Budget Report, the last before next year’s general election, has been confirmed as taking place on Wednesday 9 December.
The impact on contractors is likely to be mixed. On the one hand, economic conditions mean the government must raise additional tax revenues, as these are naturally likely to target higher earners, including many contractors. However, the government will also want to produce a budget that is ‘friendly’ towards small and medium sized businesses, in order to stimulate growth in the economy.
Plus, there remain the spectres of action on income shifting and umbrella company expenses, which, in recent budgets, the Treasury has elected to leave untouched. But Darling may be forced to bring forward proposals in these areas as revenue-raising initiatives to contribute to the reduction of the UK’s massive public sector debt.
Tax hikes, tax falls – where will they leave contractors?
Already set to come into force next April are the 50% tax rate on contractors earning over £150,000 per year, plus the slashing of personal and pension allowances. In addition, it would not be unexpected if there were further taxes introduced for contractors on higher earnings. In particular, by changing the complex array of personal allowances, Darling could widen the tax base to capture more contractors in the higher rate tax bands.
Capital Gains Tax is also forecast to increase, impacting on contractors with growing businesses and investment portfolios. There may well be increases in inheritance tax, as this is an area where Labour feels on safe ground when attacking one of the few policies actually detailed by the Conservatives. In addition, contractors with second homes used as holiday lets may also be hit by new Pre-Budget Report proposals.
However, contractors who use their own contractor limited company may benefit from a possible decrease in the basic rate of corporation tax, as the Chancellor applies measures to stimulate economic growth and the job market by improving the lot of small and medium sized enterprises.
Significant increase in anti-avoidance measures
The biggest source of increased revenues is likely to result from the massive up-scaling of anti-tax-avoidance measures. As previously reported, HMRC has a war chest of £1 billion to spend tackling tax dodgers.
HMRC’s crackdown on avoidance is likely to have a big impact on contractors, as the number of inspections is forecast to increase and contractors have traditionally been viewed by HMRC as easy targets. Those using registered tax avoidance schemes or offshore solutions are also highly likely to come under the spotlight.
The scope of the Chancellor's actions will be limited, as imposing too harsh a tax regime at this time could kill off the fragile recovery forecast for early 2010
However, contractors running genuine contracting businesses that invest in professional assistance for contract reviews and tax investigation insurance should have little to fear from an inspection, although the disruption to contractor’s working patterns can be considerable.
Contractors and the Pre-Budget Report
The Pre-Budget Report is used by government to announce its economic plans and to prepare the country for the full budget in April 2010, which is likely to be shortly before or shortly after the next general election, which must take place by June 2010.
The scope of the Chancellor’s actions will be limited, as imposing too harsh a tax regime at this time could kill off the fragile recovery forecast for early 2010. Also, of course, the government will be unwilling to take unpopular and far-reaching decisions so close to an election.
ContractorCalculator will be publishing full reports and analysis of the Pre-Budget Report as it happens on 9 December, with a particular focus on the impact on contractors.
Published: Thursday, November 12, 2009
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