Contractors have done well out of the Autumn Statement 2014, with the prospect of lower taxation, increased tax-free savings and Stamp Duty reform putting money directly into contractor’s pockets.
But the Chancellor George Osborne also tackled several major contracting issues in his statement that could also have a major impact on contractors. Not all of them may be so positive.
These include the planned umbrella company consultation, the ongoing focus on tax avoidance and the acknowledgement that self-employment is a structural labour market phenomenon and here to stay.
Tax saving and pensions headline masked more fundamental contracting issues
“The headline tax, pensions and savings benefits to contractors masked some other major contracting issues that are included in this year’s Autumn Statement,” believes ContractorCalculator CEO Dave Chaplin.
“Whilst the relentless focus on tax avoidance only affects the small minority of contractors who use such schemes, the concern is that HMRC will begin to abuse its ever increasing powers by targeting the wider contractor population with its compliance work.
“However, the umbrella company consultation may initially look like a threat to contractors working that way, but it could end up being a blessing in disguise and result in measures to encourage greater compliance by rogue service providers in the sector.
“And this year’s statement may go down as marking a paradigm shift in how government views the growth in contracting. It acknowledges that increased self-employment and contracting is a structural phenomenon and here to stay.”
Umbrella company review a “potential breakthrough for industry”
During his speech, Osborne said that he will open a consultation on what he called the use of “so-called umbrella companies that deprive people of basic employment rights like the national minimum wage and, as a result, avoid tax”.
Despite this negative stance by the Chancellor, Chaplin’s positive take on the umbrella company consultation is shared by professional employment services provider Parasol’s founder and chief executive Rob Crossland.
“This could be the landmark moment that policymakers finally take the time to properly understand our industry,” highlights Crossland, “differentiating between unethical cowboys at one end of the spectrum and compliant, professional providers such as Parasol at the other.”
Equally, Freelancer and Contractor Services Association CEO Julia Kermode is upbeat about this move: “"We welcome the Chancellor’s promise to deal with those umbrella employers who facilitate the abuse of the employment rights of the UK’s flexible workforce.
“We welcome the opportunity to share our expertise and experience with the Government to dispel some of the myths around umbrella employers, help improve standards and stamp out unethical practice in this sector.”
But the umbrella consultation is a done deal, according to government figures
Interestingly, the government clearly believes that the outcome of the umbrella consultation is a done deal, and will result in increased tax yield. On page 65 of the statement document, under expected earnings from Avoidance, planning and fairness measures, the government estimates that it will receive additional tax income of £120m from umbrella companies in 2016-17, and £90m the following year.
In response to these figures, Kermode told ContractorCalculator: “There seems to be a suggestion that tax relief on home to work travel expenses for temporary workers adds up to significant sums of money not being received by the government.
“Research suggests that this is not the case for compliant firms that adhere to our code of conduct, and therefore is unlikely to generate much income.”
Crossland notes: “I was slightly concerned by the premise of Mr Osborne’s statement, which seemed to imply that he thought all umbrellas deprived people of basic employment rights. However, the forthcoming review offers the ideal opportunity to address any such misconceptions.”
Tax avoidance measures by strengthening DOTAS could cause collateral damage
“The tax avoidance measures included in the statement were mostly targeting corporations and the more extreme types of tax avoidance schemes that only the very highest earning contractors will use,” continues Chaplin.
“However, yet another anti-avoidance consultation has been announced to introduce further deterrents for so called ‘serial tax avoiders’ and penalties for when the General Anti-Abuse Rule (GAAR) applies. HMRC lacks the resources to properly implement the tax legislation in place without having yet more powers. You only need to look at the example of IR35 to see that.”
Avoidance measures targeting umbrellas could damage the flexible workforce
Andy Chamberlain, Senior Public Affairs Manager of the Association of Independent Professionals and the Self Employed (IPSE) shares Chaplin’s concerns, giving the umbrella company consultation as an example of how anti-avoidance measures can backfire: “It is encouraging that the Chancellor is introducing measures to crack down on tax avoidance.
“However, we urge that the chancellor ensures that any changes to umbrella companies provide real benefits to those using these structures and do not inadvertently affect the genuinely self-employed.”
These sentiments are echoed by an expert independent financial adviser (IFA): “The law of unintended consequences could mean that these enablers of an efficient and flexible payment route for the freelance community could be caught in measures aimed at certain exploitative firms.”
“If this was to be allowed to happen it could put a significant handbrake on the current exciting growth of flexible working patterns that so benefit the UK economy.”
Self-employment is here to stay –its official
On page 13 of the Autumn Statement, as part of the analysis of UK contact and jobs growth, the government appears to take a huge leap forward in its view of the contracting and self-employed workforce.
By its acknowledgment that the increase in self-employment is structural, and not just because workers can't find full time permanent work, we can hope that the government will include contractors and the self-employed more centrally in its policymaking
Dave Chaplin, ContractorCalculator
Chaplin explains: “By its acknowledgment that the increase in self-employment is structural, and not just because workers can’t find full time permanent work, we can hope that the government will include contractors and the self-employed more centrally in its policymaking. This is reinforced by the appointment of the new contracting tsar David Morris on National Freelancers Day.
According to the Autumn Statement: “Recent ONS analysis shows the rise in self-employment since 2008 primarily reflects fewer people leaving self-employment, with an increase in those who have been self-employed for 20 years or more.
“This suggests ongoing structural change in the labour market, rather than people becoming self-employed because they cannot find other work.”
No IR35 or employment status
There was no mention of IR35 or the Office of Tax Simplification’s (OTS) employment status review, or indeed any specific mention of contractors or freelancers. Chaplin was not surprised by these omissions.
“Even with the recent abolition of the business entity tests and the imminent review of IR35 by HMRC, we did not expect to see it mentioned in this Autumn Statement,” says Chaplin. “Similarly, the OTS employment status review is a work in progress, so we would not expect to see any updates on this project.
“But by the time the Budget 2015 arrives in March 2015, things may be different,” warns Chaplin.