As a result of announcements made during the last Budget, contractors will have to potentially negotiate four pieces of new tax legislation. Here we set out the main aims of each tax proposal, stripped of as much jargon as possible.
Proposed changes to IR35
This piece of legislation has been with us for over 15 years now. It has been tinkered with several times, and various attempts made to improve it, but fundamentally it remains unaltered in its main aim – to tax those working via their own limited companies if they are deemed to be ‘disguised employees’. The official guidance remains inadequate, and the ambiguous nature of the legislation continues to confuse and concern contractors.
Despite this, in July, the Government released a consultation document entitled ‘how to make IR35 more effective in protecting the Exchequer’, claiming that it has evidence that IR35 avoidance is ‘widespread’ – partly due to the burden of proof lying with limited company owners themselves (who typically carry out the contract assignments).
Most controversially, one suggestion contained within the document is to pass on the burden of proof of IR35 compliance to end-clients. Interested parties have until 30th September to respond to the Government’s proposals.
One measure which will affect almost all limited company contractors is the overhaul of the way dividends are taxed, from April 2016.
The current system of tax credits will be replaced by 3 fixed tax rates on dividend income – 7.5% (basic rate), 32.5% (higher), and 38.1% (additional).
And, the promised £5,000 ‘dividend allowance’ now appears to be nothing of the sort, as it merely sits within the taxpayer’s existing tax bands.
The impact on contractors will be significant.
If you pay yourself the most tax-efficient salary for the current year, plus £80,000 in dividends in 2016/17, you will have to pay over £4,000 in additional taxation.
Employment Allowance Restriction
Introduced in April 2014, the Employment Allowance (EA) reduces the National Insurance bill all firms have to pay – as an incentive to create new jobs. Businesses can claim up to £2,000 against their Employers’ NIC bills each year.
For example, a limited company contractor paying a single £10,000 salary during the first year of the incentive’s existence would have saved £226 in Employers’ NICs.
Since its inception, those caught by IR35 were excluded from claiming the EA against their deemed payment.
During the Summer Budget, the Chancellor announced that the EA will rise to £3,000 from April 2016, but significantly it would no longer be available to limited companies where a sole director is also the sole employee.
Travel & Subsistence Expenses
The Government claims that some unethical service providers have abused the current system of travel and subsistence expenses tax rules, primarily by using overarching contracts of employment to enable workers to claim tax relief on expenses that are not entitled to.
As a result, the Government has proposed to restrict this type of tax relief to workers who carry out their duties under the ‘supervision, direction and control of the end-user’ (SDC).
Unfortunately, a clumsy implementation of this restriction would have a massive impact on professional contractors who rack up significant travel and expenses claims legitimately.
Interested parties have until the end of September to make their views heard. IPSE and other contracting groups have urged contractors to submit their own views to demonstrate the punitive impact this measure would have.