Contractors have been left with more questions than answers in the wake of the Autumn Statement 2015. With the Government remaining tight-lipped over plans concerning IR35 and the taxation of personal service companies (PSCs), contractors face further uncertainty over their work status and their tax dealings. This makes it more important than ever for contractors to consider using specialised accountants to ensure that their tax affairs are all in order.
This is according to Duncan Strike, director of contractor accountants Intouch, who highlights: “There is a lot happening at the moment. I don’t think I have ever known a period of two years where there has been more activity with regards to tax and regulations that impact contractors.”
“Contractors need to think about the future. They need to think about how IR35 changes, amongst other things, could affect them, and what can they actually do about it. Your average accountant isn’t going to have his finger on the pulse and know where this is all going. That’s where a specialist accountant will win hands down.”
IR35 silence leaves contractors in limbo
Whilst contractors will be relieved that no kneejerk measures to address IR35 were announced at the Autumn Statement, a lack of clarity over the Government’s next move leaves the contingent workforce in a period of uncertainty.
However, Strike sees this as a sign that HMRC is granting more consideration to the legislation than it previously has, and expects a consultation to follow. Considering the increasing emphasis placed on supervision, direction or control (SDC) within the IR35 discussion document, and its involvement with travel and subsistence (T&S), Strike expects SDC to play a major part in any new legislation.
“It’s an interesting situation, because IR35 already looks at control, but within a far narrower field. So it could be that, by extending the control tests to SDC, HMRC would widen the catchment of people caught by IR35. The question then is whether there will be a single SDC test, or whether there will be another element to it.”
Still many questions to be answered for contractors
As Strike notes, the implications of falling within the scope of IR35 are also far from black and white: “A company can be within the legislation, in terms of the scope of who it catches, but that doesn’t necessarily mean the company is within IR35, because that’s contained within the legislation.”
Strike believes that there’s almost a two-tier test that should be considered:
- Is this company the sort of company that falls into the definition of an intermediary for the purposes of IR35?
- Then, having decided that IR35 needs to be considered: Does the contractor fall within the legislation?
“Also, if T&S is based on SDC, and IR35 is based on numerous factors – one of which is control – could you have a situation where you are within IR35 but can still claim T&S because of SDC? Or, be outside of IR35 but unable to claim T&S because of SDC?
“The legislation could create a whole raft of different anomalies as to how this is going to integrate between intermediaries legislation and T&S in terms of definitions of SDC, but also with regards to how this would all come together.”
“Digital revolution” will be a burden for contractors
Contractors can also expect to be completing quarterly online tax returns as soon as 2020. This comes after the Chancellor announced the implementation of a new digital service in an attempt to modernise UK tax administration.
HMRC anticipates that its “digital revolution” will raise an additional £600m a year, due to the increased surveillance of contractors’ tax affairs. However, accountants have flagged this up as another measure which places a significant burden on contractors, for many of whom an annual submittal is difficult enough.
As Strike highlights, this arrangement could also cause further complications for limited company contractors who pay themselves through a combination of salary and dividends.
“Consider what this would mean for a contractor with higher rate tax liability. It would accelerate the need to take money out of the company in order to pay the taxes that are due on the dividends, which could result in a negative cash flow for the contractor.
“Contractors will be disadvantaged because they will have to take out more money in advance in order to account for the fact that they will have to start paying their higher rate taxes much earlier. Either way, they will clearly need to start reporting their dividend income on a more regular basis, which inevitably adds to their workload.”
Umbrella providers face testing times
The one definitive outcome for contractors from the Autumn Statement concerns T&S relief for umbrella company contractors. This comes after the ‘blue book’ confirmed that the Government is set to go ahead with plans to impose restrictions which will, in many cases, remove any chance of obtaining tax relief for mileage and other travel and subsistence for umbrella contractors.
“For some contractors, working through an umbrella company will no longer benefit them,” Strike explains. “This is a major threat to the commercial viability of the umbrella model.”
Many umbrella providers will be looking to restructure their existing business models in order to sidestep the restrictions on expenses. The risk of course is that anything launched in readiness for April 2016 will be wholly untested and certainly within HMRC’s crosshairs. Strike points out that any avoidance techniques employed by umbrella companies are likely to be countered by the General Anti Abuse Rule (GAAR).
The restriction on claiming tax relief at source, which was introduced in the Budget earlier this year, is also due to come into effect in April 2016. Umbrella contractors had hoped this would be relaxed, but there are no signs of any let up from the Government.
Contractors should seek specialised assistance
Regardless of the outcome over IR35, contractors are already at a significant disadvantage from a tax perspective, due to the disproportionate amount of technical analysis that needs to be carried out.
As Strike highlights, the act of incorporating, which is a necessity for many contractors, brings with it many considerations that contractors are better off passing over to someone more qualified.
“Most contractors are not running a limited company with any expectation to build a big business, but these one-man bands still have to abide by the same level of regulation as other businesses, taking IR35, employment law, Managed Services Companies (MSC) legislation, T&S, expenses, salary sacrifice and other factors into consideration.
Strike concludes: “These contractors want to focus on providing their own service, offering the skills that they have. They need an accountant who is more prepared to hand-hold and step in to help them, and to do things that many other businesses of a similar size may well do themselves.”