Contractors could be one of the groups of taxpayers that end up footing the bill for the Chancellor George Osborne’s so-called Stability Budget planned for 8 July 2015. Pre-election promises freezing most tax options give Osborne few fund-raising options.
So, the removal of expenses tax reliefs and collateral damage resulting from new onerous anti-tax avoidance rules could end up costing contractors dearly, despite the Conservatives being the avowed party for business.
The new Government has promised to both reduce the deficit at the same time as increasing spending on the NHS. Part of this is going to be funded by £12bn of savings from the welfare budget, the details of which we will presumably learn on 8 July.
But the Conservatives promised that income tax, National Insurance Contributions (NICs), VST and the main rate of corporation tax will not be increased during this Parliament. Personal allowances and the higher rate threshold are set to increase, and the top rate of tax will remain at 45%. So, where will the money come from?
There are no obvious costly ex-LibDem partner policies that can be dismantled that will deliver the huge savings needed.
That then leaves other methods of taxation, such as various industry specific measures, duties, capital gains tax and inheritance tax. And there are tax reliefs and allowances – such as those on expenses - and further anti-tax avoidance measures. Contractors are unlikely to come out well from any changes to the latter two.
The umbrella company expenses consultation that was opened in December 2014 ended on 10 February 2015. We also know from the same consultation that the Treasury and HMRC are seriously considering whether similar measures could be applied to personal services companies (PSCs). The consultation said that the cost to the Exchequer of umbrella company contractor expenses tax relief is estimated to be £400m each year.
Although no further announcements have been made and it was promised that new legislation would not appear until 2016, there is plenty of time between now and 8 July for the Treasury to publish draft legislation removing tax relief for umbrella company expenses.
Umbrella trade bodies such as the Freelancer and Contractor Services Association have demonstrated that the £400m estimate is wildly optimistic. And it is a drop in the ocean compared to the extra billions needed for the NHS. Still, it may happen.
With the raft of new anti-avoidance legislation introduced in recent years, including the General Anti-Avoidance Rule (GAAR), Accelerated Payment Notices (APNs) and Follower Notices (FNs), it is difficult to see where HMRC can go next.
However, as the lines between tax avoidance and tax evasion have been deliberately blurred by both politicians and the media, so tax avoidance may become re-framed to include both new taxes and previously legitimate allowances.
What will we see? An attack on dividends? The settlements legislation (remember Arctic Systems?) changes resurrected? More rigorous enforcement of the GAAR? Whatever the new measures there is a risk that contractors will be swept up as collateral damage.
The Conservatives are the party of big business; they are not necessarily the friends of the UK’s small to medium sized enterprises (SMEs).
For contractors, the July Stability Budget may be anything but, and the UK’s smallest businesses may be called upon to finance the Chancellor’s giveaways.