Contractors may be facing major upheavals after the 2013 Budget as a result of the soon to be introduced General Anti-Avoidance Rule (GAAR) and forthcoming IR35 changes. Or the Budget could turn out to be a relatively contractor-neutral budget.
Possible contractor-specific measures being introduced in the 2013 Finance Act include:
- IR35 clause covering office holders: will this be accompanied by new, tougher HMRC guidance for public sector contractors?
- GAAR: the General Anti-Avoidance Rule, which may be applied to tackle perceived avoidance by personal service companies, such as contractor limited companies
- Statutory residency rules: contractors working overseas but with families rooted in the UK will be affected
- Expenses rules changes to round sum allowances, designed to tackle umbrella company expenses abuses.
Plus, contractors will be impacted by other measures that will change income tax allowances, as previously announced in Chancellor George Osborne’s 2012 Autumn Statement.
IR35 and office holders
Although the 2012 Budget document only included a brief mention of IR35, the ramifications, with the introduction of HMRC’s risk-based approach and the business entity tests, were significant.
However, despite the new measures and HMRC’s increased compliance activities, the 2012 Budget measures did not fundamentally affect the underlying IR35 legislation. So genuine, well insured contractors adopting IR35 best practices had few concerns.
Commentators fear that the new clause being introduced to the source IR35 legislation, expanding its coverage to include office holders, may have more far-reaching impacts
But commentators fear that the new clause being introduced to the source IR35 legislation, expanding its coverage to include office holders, may have more far-reaching impacts. This may not be just through the legislation, but accompanying changes to HMRC’s guidance and enforcement.
General Anti-Avoidance Rule (GAAR)
The clue to the potential impact of the General Anti-Avoidance Rule (GAAR) is in its name: anti-avoidance.
And the limited company contractor strategy of ‘avoiding’ paying higher income tax and National Insurance Contributions (NICs) is perceived by HMRC and the Treasury as an avoidance scheme.
In fact, tax avoidance by company owners taking low salaries and high dividends enjoys its own section in HMRC’s ‘tax gap’ analysis. The government has tried in the past, through measures such as expanding the scope of the settlements legislation, to crack down on this tax strategy.
Although GAAR remains untested, HMRC is likely to apply this new addition to its powers swiftly and with maximum impact. Contractors, and the contracting model of personal service companies already perceived as a soft target, may be among the first test cases.
Contractors using offshore avoidance schemes will also come under HMRC’s microscope, particularly as further measures are planned to increase the disclosure of tax avoidance schemes (DOTAS) legislation.
Updates to the tax residency rules
Contractors working on contracts outside the UK for long periods have traditionally benefitted from the UK’s residency rules, which allow them to enjoy often lower tax rates from local tax regimes.
Contractors with no significant family, social or property ties to the UK will see little change. However, new measures being introduced in the 2013 Budget will impact on contractors with families, children and other connections that clearly show they have strong bonds with the UK.
A new statutory tax residence test (SRT) will remove many grey areas of the former regime and analyse an individual taxpayer’s ties to the UK, including family, work, property and social ties.
It is likely that many contractors formerly enjoying ‘expat’ status, and its associated tax benefits, will be classed under the new rules as resident in the UK, and will be required to pay UK tax accordingly.
Round sum expenses changes
ContractorCalculator revealed in January 2013 that rules covering ‘round sum’ expenses claims without receipts may well be reviewed, and may even be banned by the Chancellor.
“We know government is targeting the contracting industry and we feel it’s only a matter of time before all round sum allowances are removed,” Parasol managing director Derek Kelly said in an interview with ContractorCalculator in January 2013.
If introduced, such changes would not impact on genuine contractors who already obey HMRC’s expenses rules and maintain high quality financial records.
However, unwary contractors following guidance from less compliant umbrella companies could fall foul of any expenses rule updates, and find themselves under investigation by HMRC as a result.
ContractorCalculator will be reporting live on Wednesday’s 2013 Budget, with contractor-relevant analysis published on Thursday.