Contractors must continue to endure IR35 for the foreseeable future, at least until it is made irrelevant by the possible merger of income tax and National Insurance suggested in the 2011 Budget.
Chancellor George Osborne also introduced a number of measures that should be generally positive for contractors. These include a consultation over the proposed merger of income tax and National Insurance plus lowered thresholds for National Insurance Contributions (NICs), which would increase contractor’s take-home pay. In addition, higher mileage allowances should help contractors with the cost of travel to client’s premises.
A better-administered IR35 is currently the “least-worst option”
As predicted in ContractorCalculator’s pre-budget white paper on IR35 solutions, the IR35 legislation has been retained because of Treasury concerns that abolition “would put substantial revenue at risk”. However, as recommended by ContractorCalculator, the government has committed “to making clear improvements in the way IR35 is administered”.
Dave Chaplin, CEO of ContractorCalculator, believes this is a reasonable result for contractors. “Whilst many were hoping for a headline-grabbing suspension or abolition of IR35, what would have followed that would almost certainly have made things worse for contractors."
“Therefore, HMRC administering IR35 more efficiently and with clearer guidance to contractors, is the least-worst option for the time being, particularly when you take into account any future merging of income tax and national insurance, which would get rid of IR35 in one fell swoop.”
HMRC to lead future IR35 administration improvements?
Contractor experts have voiced concern that the “clear improvements in the way IR35 is administered” offered in the full Budget 2011 document fall short of recommendations in the Office of Tax Simplification’s (OTS) interim report on Small Business Taxation. These recommendations included closer industry involvement and information sharing with HMRC.
“We don’t see any talk of the kind of collaboration proposed by the OTS in the Budget,” notes Andy Vessey of IR35 experts Qdos Consulting. “Our concern is that the specialists manning the proposed dedicated helpline will be HMRC’s specialists.”
James Abbott owner and head of tax at contractor accountant Abbott Moore LLP shares Vessey’s concerns that the improvements of IR35’s administration will be HMRC-led: “The Budget suggests an HMRC-led, in-house process. Any examples given by HMRC must clarify the grey areas of IR35’s enforcement, as it’s not black and white.”
The Budget suggests an HMRC-led, in-house process. Any examples given by HMRC must clarify the grey areas of IR35's enforcement, as it's not black and white
James Abbott, Abbott Moore LLP
IR35 compliance to be targeted on ‘high risk cases’
On the Chancellor’s decision not to abolish IR35, Vessey was unsurprised: “We could have anticipated that IR35 would be retained, given the options. But a central theme of the OTS’s recommendations was to encourage increased knowledge sharing between HMRC and the IR35 compliance industry, which could only benefit everybody.
He has concerns about the effectiveness of an HMRC advice service. “Does HMRC have the resources to support a helpline and how many contractors will choose to confide in the revenue?” asks Vessey. As he points out, HMRC’s contract review service launch at the same time as IR35 in 2000 quickly became discredited because its decisions heavily favoured HMRC’s revenue-generating agenda.
“However, if HMRC does adopt an approach targeting high-risk contractors, it has information that it can apply straight away, such as Corporation Tax returns, P35 and self-assessment,” says Vessey. “An initial compliance check would provide enough information for an experienced tax inspector to decide whether to take the case further.”
Does HMRC have the resources to support a helpline and how many contractors will choose to confide in the revenue
Andy Vessey, Qdos Consulting
Contractors concerned about their IR35 status and the risk of being found inside the legislation can use ContractorCalculator’s free online IR35 test, which has been developed with expert input from Qdos Consulting.
Further work to define “clear improvements” in IR35’s enforcement
Vessey concedes that it is also possible that when OTS submits its final report in June 2011, the OTS may have further developed its recommendations for improved administration. “It’s definitely a move in the right direction,” he adds. “However contractors will still need independent IR35 experts to weigh up the full range of status factors in each case.”
PCG’s Managing Director John Brazier confirmed that the contractor and freelancer body plans to play its part in ensuring any changes to IR35’s enforcement benefits contractors: “We are encouraged that the government intends to put in place various mechanisms to ensure HMRC improve its processes of administration.
“We intend to play a key part in this process and are determined as a result to exclude all legitimate freelancers from the ongoing threat of an IR35 investigation, with all the uncertainty that brings.”
Budget tax implications for contractors, including some silver linings
Although the personal allowance has increased to £7475, Abbott says that the corresponding fall in the higher rate threshold to £35,000 means most contractors will be paying the same amount of tax.
We are encouraged that the government intends to put in place various mechanisms to ensure HMRC improve its processes of administration
John Brazier, PCG
“Much attention has focused on the increase of employee and employers’ NICs by 1% respectively,” explains Abbott, “but the significant change for contractors is that the thresholds at which contractors start to pay NICs have increased.”
As Abbott highlights, the threshold for paying employee’s NICs has risen to £139 per week, above that of employers’ NICs, which means contractors can pay themselves an elevated salary of £585 per month. That’s a significant jump above the previous amount of £475 per month, representing an increase of 20%.
“The amount of their basic personal allowance that can be paid as salary without attracting NICs has increased,” continues Abbott. “However, contractors who pay themselves a salary above the threshold will find themselves paying a lot more, having to fund the 1% increase in both employee and employers’ NICs.”
Anti-avoidance measures could result in ‘triple whammy’
Anti-avoidance measures have played a big part in the Chancellor’s plans to raise revenues, including the disguised remuneration legislation targeting contractors using Employee Benefit Trusts.
“Offshore tax solutions suit contractors with a certain risk profile, and contractors should take proper advice and enter into such schemes with their eyes open,” warns Abbott. “The risk is that, in addition to paying the scheme provider’s fees, which can be considerable, the contractor could also end up being found liable by HMRC for unpaid income tax and NICs.”
And now for some better news...
There are a number of measures that may benefit contractors:
- Mileage rates have increased 5p to 45p a mile for the first 10,000 miles, but staying at the pre-budget level of 25p a mile thereafter
- The compulsory VAT registration threshold has increased to £73,000
- HMRC’s ‘time to pay’ scheme for contractors to spread tax liabilities has been extended.
James Abbott is the owner of Abbott Moore LLP and often speaks on freelancer / contractor tax matters. He has his own growing portfolio of contractor clients.
Abbott Moore LLP are PCG Accredited Accountants and specialise in providing tax advice to freelancers as well as dealing with their year end accounts and tax returns.
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There’s also some more neutral news for contractors:
- New childcare schemes for higher rate taxpayers created after 6 April 2011 will only allow a saving of £10 per week, to bring the tax benefits of higher rate taxpayers in line with basic rate taxpayers
- Previously announced pensions changes will be implemented as originally planned.
The full budget document can be downloaded from the Treasury website.
Published: Wednesday, March 23, 2011
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