If proof were needed that successive governments seem hellbent on removing any of the final benefits associated with limited company contracting, then this year’s Autumn Statement may provide just just that.
Here is a summary of the main changes announced by Phillip Hammond on Wednesday.
Public Sector IR35 changes to go ahead from April 2017
Confirmation was provided that next year’s proposed public sector IR35 reforms will go ahead as planned – meaning that recruitment agents (on the whole) will be responsible for ensuring that contractors are correctly operating the IR35 rules.
If deemed to be caught by IR35, the public sector organisation or agency in the chain will be forced to pay the contractor as they would a traditional employee – via the PAYE system.
This was confirmed in section 4.11 of the Autumn Statement summary which states:
“This reform will help to tackle the high levels of non-compliance with the current rules and means that those working in a similar way to employees in the public sector will pay the same taxes as employees.”
Trade body, IPSE, claims that this measure will result in 50% of current public sector contractors moving to private sector roles, whilst those remaining will be forced to increase their rates accordingly.
These proposals have been widely condemned by businesses, including those featured in HMRC’s own research.
Although the public sector off-payroll changes are controversial enough, the question many in the industry are asking is – will this measure be expanded to cover private sector contractors in the future?
No more tax-free IR35 ‘administration allowance’ for those caught
However, even those public sector contractors caught by the new IR35 rules next April face a further penalty in that they will no longer be able to write off a flat 5% allowance against their Corporation Tax bills to cover the administrative costs of running a company.
According to the Government, this change reflects “the fact that workers no longer bear the administrative burden of deciding whether the rules apply.”
Unfortunately, this change ignores the fact that all limited companies, regardless of the IR35 status of some of the contracts they operate, still have to bear the normal costs of running a business.
Flat Rate VAT scheme benefits removed
Another measure which may have an impact on large numbers of contractor companies is a change to the way the Flat Rate VAT scheme is operated.
Rather than calculating how much VAT is due to HMRC each quarter, those on the scheme calculate their liability using a fixed percentage according to their trade/profession . Currently, for most IT contractor companies, this rate is 14.5%.
From 1st April 2017, a new 16.5% rate will be introduced for “businesses with limited costs, such as many labour-only businesses.”
The Autumn Statement document claims this change “will help level the playing field while maintaining the accounting simplification for the small businesses that use the scheme as intended.”
A ‘limited cost business’ is one which incurs costs of less than 2% of VAT inclusive turnover or, if greater, less than £1,000
Unfortunately, this measure on its own increase the tax burden of affected limited companies by thousands each year.
Clampdown on ‘disguised remuneration’ schemes
Section 4.46 states the Government’s aim of clamping down on the use of ‘disguised remuneration schemes’ by the ‘self-employed’, in addition to its current efforts to tackle the use of such tax vehicles by employers and employees.
Salary Sacrifice schemes
From April 2017, the tax benefits of using a salary sacrifice arrangement will also be removed in most circumstances.
According to Section 4.13: “This will mean that employees swapping salary for benefits will pay the same tax as the vast majority of individuals who buy them out of their post-tax income.”
Pensions, childcare and cycle to work schemes will be protected
Alongside the measures listed above, the Chancellor also announced the following changes, which are generally of interest to our readers:
- The Corporation Tax rate (currently 20%) remains on course to fall to 17% by 2020, beginning with a 1% to 19% on April 1st 2017.
- The Income Tax threshold will rise to £11,500 from April 2017, a rise of £500.
- The rates of Employees’ and Employers’ National Insurance thresholds to be equalised at £157 per week from 1st April 2017.
- The Autumn Statement is to be abolished. From 2017, there will be autumn Budgets, followed by spring Statements – which will not be significant policy events (as the current Statement is now).