Contractors expecting a pre-election giveaway Budget on Wednesday are likely to be disappointed. The parlous state of public finances provides the Chancellor with limited options, especially in this pre-election period. On the positive side, no further anti-contractor initiatives are likely to be introduced or amended on things like umbrella company expenses, IR35, Section 660 and dividends (i.e. income shifting) on personal service companies (PSCs).
So says Derek Kelly, managing director of contractor accountant ClearSky, who forecasts what will be seen as a ‘sensible’ Budget for Wednesday 24th March. After all, he points out, the nastiest measures from the December 2009 Pre-Budget Report aimed at higher earners are already known. “The top earning contractors already know their fate, with the 50% tax band and restrictions on pension allowances,” says Kelly. “But the freeze in personal allowances means every taxpayer will be contributing more ‘stealth-tax’ in real terms from April onwards.”
Kelly also has some startling predictions: “There are around 1m contractors working in the UK today, and I forecast that in three years we’ll see this total leap to 2.5m as future Budgets change the divide between the public and private sectors. Contractors are vital to the wellbeing of the UK economy, and a farsighted Chancellor would acknowledge that in the Budget.”
No pre-election giveaway Budget
Kelly anticipates much tinkering with allowances, but no grand electioneering gestures: “It’s unlikely we will see the much-debated VAT increase, because however good it may be for the nation’s finances, it would be heralded as a political and economic disaster by the opposition parties.
“Most likely we will see inflation-busting increases in fuel, alcohol and tobacco duties,” he continues. “Also likely are changes to the personal allowances rules for those earning over £100,000, dressed up as simplification but targeting higher yields from an income bracket unlikely to garner much sympathy from voters.”
Contractors are vital to the wellbeing of the UK economy, and a farsighted Chancellor would acknowledge that in the Budget
Derek Kelly, ClearSky
And, according to Kelly, with the emphasis on economic stimulus through business growth as the solution to the economic woes, threatened rises in Capital Gains Tax [CGT] are unlikely to materialise. “The government needs to incentivise entrepreneurs to start and grow businesses that generate jobs over the long term,” he says. “Increasing CGT will have the opposite effect.”
Forecast impact on contractors
With the exception of the higher earning contractors paying up to 60% of their income to the Exchequer from April, Kelly predicts that although most of the changes will be minor, all contractors will be slightly worse off.
Limited company and umbrella company contractors can expect:
- IR35 – no change
- Section 660/family business tax – no change
- Dividends on PSCs – no change
- Company cars – increase in Benefit in Kind (BIK) for higher emission cars
- No changes to expenses rules.
Changes affecting all contractors, including their personal circumstances:
- Increases in alcohol and tobacco
- Increase in fuel duty and road fund licence (except for greener vehicles)
- A freeze in personal allowances
- Capital Gains Tax (CGT) – no change
- VAT – no change.
However, Kelly warns the flat-rate VAT scheme might be under threat. “Because some businesses have abused the flat-rate VAT scheme by creating ‘one-man-umbrellas’, it’s possible that we will see changes to or even the abolition of the scheme.”
Compliance powers, but without the resources
Compliance will be a hot topic and HMRC’s powers may well be increased, although, as Kelly explains, HMRC lacks the resources to enforce the powers they already have. “Anti-avoidance initiatives will continue and contractors with funds offshore will find themselves under an increasing amount of unwelcome attention,” he warns.
For the same reason, Kelly is convinced umbrella company expenses are unlikely to be subject to further regulation. “The Treasury is driving for increased regulation, but other branches of government are telling officials that significant numbers of HMRC’s experienced inspectors have been made redundant and retired, so there’s no-one to police the rules.
“Attacking non-doms and tax evaders with secret funds in offshore bank accounts is now quite politically correct and does seem to attract the resources needed from HMRC,” he continues. “So I would urge contractors currently using offshore tax schemes, or considering joining one, to think carefully about the risks as well as the rewards.”
Tackling public sector waste and inefficiency
Kelly highlights that the flip side to the revenue-raising element of the Budget will be cutting costs. “Like a business running at a loss, the Chancellor can increase UK PLC’s ‘sales’ through higher taxes and reduce its costs with public sector expenditure cuts, thereby showing a ‘profit’.”
There are around 1m contractors working in the UK today, and I forecast that in three years we'll see this total leap to 2.5m as future Budgets change the divide between the public and private sectors
Derek Kelly, ClearSky
But with one in six workers now on the public payroll, by exercising spending restraint the government might be risking a political backlash at the polls in May. And, according to Kelly, cutting public sector jobs will swell the ranks of contractors.
He explains: “Let’s say a local authority sheds a thousand workers. Then it discovers a year later the jobs those workers did still need doing, so it hires 1,000 contractors on a decent rate. What’s changed? In the short term, costs are neutral or slightly higher, but it’s much better for the economy in the long term, because there is no future public sector pension liability for those workers, who will have to make their own provision for the future.”
Published: Monday, March 22, 2010
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