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Spring Budget 2017 for contractors: Chancellor sustains attack on contractors

The Chancellor Philip Hammond’s 2017 Spring Budget heaped further bad news on contractors. It included announcements of a reduced dividend allowance and hikes in National Insurance Contributions (NICs), as well as confirmation of the public sector IR35 reforms.

The key points for contractors from the 2017 Budget:

  • Reforms to IR35 in the public sector will go ahead as of 6 April 2017
  • The dividend allowance will be cut from £5,000 to £2,000 from April 2018
  • Class 4 NICs for the self-employed to rise to 10% in 2018 with Class 2 NICs to be abolished.

“Today’s announcements are deeply concerning for contractors,” warns ContractorCalculator CEO Dave Chaplin. “The Chancellor has demonstrated that the Government doesn’t recognise the value of the UK’s self-employed. His insistence on reducing the gap in terms of tax paid between the employed and self-employed undermines the risks the UK’s contingent workforce undertake.”

Budget 2017: What do we know about the IR35 reforms?

The Government has remained quiet on the IR35 reforms, despite their imminent arrival. Only a brief mention was dedicated to the changes in the red book, summarising their predicted impact on the Exchequer.

Prior to the Budget, stakeholders were hoping for some clarity over where the tax liability lies if HMRC overturns an outside-IR35 decision by a public sector client, with some speculating that a duty of care would be introduced to help protect recruitment agencies.

As it stands, the client is responsible for determining a contractor’s status, but the recruitment agency – if there is one in the chain – is responsible for deducting tax at source via Pay As You Earn (PAYE).

But today’s Budget provides no further clues, suggesting that agencies will be required to take on the risk. For Chaplin, this decision is nonsensical: “Agencies are being asked to take the entire tax risk based on a decision that they do not make themselves. It doesn’t make sense.”

The Association of Recruitment Consultancies (ARC) has been applying legal pressure on HMRC regarding the reforms, after ContractorCalculator uncovered major flaws in the beta version of its Employment Status Service (ESS) tool.

Limited company contractors face tax hike from dividend changes

The Chancellor began his speech with praise for the UK’s self-employed, whom he referred to as “the lifeblood of our economy”. Unfortunately today’s announcements failed to reflect that sentiment.

The big news for limited company contractors is that the tax-free dividend allowance is set to be cut by more than a half from £5,000 to £2,000 from April 2018. This will mean a tax increase of £225 per year for limited company contractors.

Prior to the announcement, the Chancellor had stressed the need to address rising incorporation, claiming the dividend allowance has increased the tax advantages of setting up a company.

“The decision to further cut the remaining tax advantages available to the UK’s self-employed couldn’t come at a much worse time,” says Chaplin. “The amount that the contingent workforce is contributing to the economy is growing at a rapid rate, so it’s bizarre to me why the Government would want to stifle that.”

Will tax changes deter would-be contractors?

The warning signs were already there for contractors. In his speech, the Chancellor referred to the probe into self-employment being carried out by Matthew Taylor, who last month told the BBC that people are creating self-employment work to try and avoid tax.

Despite being fundamentally flawed, the Chancellor reinforced his and HMRC’s belief that two people performing the same work should be taxed the same, adding: “a strong society requires a tax system that is fair.”

The abolition of class 2 NICs for the self-employed from 2018 was also confirmed, with class 4 NICs set to rise from 2% to 10%, with a further 1% increase in 2019. The Chancellor said this would help account for the £5bn lost to the Exchequer through lower NICs contributions from the self-employed.

"If you are one of the hardworking self-employed people who face a significant increase on your tax bill, you might feel that the Chancellor has it in for you,” comments Chris Bryce, chief executive of the Association of Independent Professionals and the Self Employed (IPSE).

“The Chancellor shouldn't forget that growth in self-employment has driven our labour market in recent years and punitive rises in tax will make many people have second thoughts about striking out on their own.”

Updated: 09 March 2017

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