It would appear that contractors' worst fears about the Pre-Budget Report (PBR) containing harmful changes to income shifting and contractors' travel expenses have not been realised, although as the details emerge over the next few hours it is possible those subjects could be buried in the detailed PBR report.
Income shifting - postponed
On income shifting proposals, the PBR has signalled the government's determination to do something about this, but not just yet. The PBR states:
"The government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax, known as income shifting. The government has consulted on this issue but, given the current economic challenges, the government is deferring action and will not bring forward legislation at Finance Bill 2009. The government will instead keep this issue under review."
Contractor travel expenses - not under attack but will be monitored
For contractors working through umbrella companies, who were threatened with HM Treasury's apparent intention to stop contractors being able to claim expenses, there has also been a 'stay of execution', with the PBR saying:
"Following the consultation Tax relief for travel expenses: temporary workers and overarching employment contracts, the government has decided to leave the current rules unchanged. However, in the light of evidence from the consultation confirming poor levels of compliance in this area HMRC will refocus its efforts to ensure that the current regime is properly applied. If compliance does not improve, the government may return to this at a later date.
And also
But whilst the greatest potential damage to the contracting sector appears to have been averted, the generally 'neutral' budget contains nothing to provide a real boost to contractors:
- Changes to VAT don't really affect contractors, most of whom simply collect the VAT and pass it on to HMRC
- The National Insurance changes will affect some contractors, but for those with limited companies the effect will be insignificant
- Income tax rising to 45% in 2011 for those earning more than £150k will affect a small number of contractors, and even that higher rate will only be applicable to the proportion of their income over £150k
- The fact that the 1p rise in Corporation Tax is being postponed will help contractors running their own limited companies, but only to a very small extent.
The ContractorCalculator team is currently analysing the detailed PBR and will be providing more detailed analysis shortly.