Budget 2016: What Contractors Would Like To See
It's almost that time of year again. If you're a regular reader of the Kingsbridge blog you'll know that we've been following the potential impact of political changes on the contractor community for a while now. Whilst the outlook had seemed quite bleak going into the winter of 2015, following on from a relatively unfavourable summer Budget, the wider picture has become a little rosier since then. An uneventful Autumn Statement was followed up by a Draft Finance Bill surprisingly void of any mention of IR35, which in turn was followed up by Julie Deane's thorough and balanced Self-Employment Review, arguing for more support for contractors and the self-employed.
So what should contractors expect when the next Budget is delivered on 16th March? There are strong rumours that the Chancellor is planning another increase in Insurance Premium Tax (IPT), up to 12.5%. Given that IPT was raised from 6% to 9.5% in November 2015, if the speculation was true it'd mean that the tax would be doubled in less than six months - a remarkable increase by any standard. Should it go ahead, an increase in IPT could raise as much as £1.3bn for the Treasury in the first year alone.
Such rumour gives credence to the feeling among many that the insurance industry is being singled out, as Treasury minister Harriet Baldwin MP more or less admitted recently in a letter to the AA, stating: "IPT is not a tax on consumers but on insurance companies." BIBA (The British Insurance Brokers' Association) also noted that a rise in IPT would discourage customers from taking out policies.
Speculation abounds that the Chancellor will also seek to end the abuse of PSC's in a crackdown on what many see as an income tax loophole. Pushed firmly into the spotlight by the media in recent months due to the likes of Fiona Bruce and Jeremy Paxman setting themselves up as "one-man companies", the Chancellor believes that the rules that were designed to help contractors and freelance workers are now widely abused and "completely unfair".
With an £18bn "black hole" to plug as a result of the significant economic downturn in recent months, Osborne seems set to renew his efforts to tackle tax avoidance. Traditionally PSC's were used by professional contractors doing short-term work for a number of clients. By paying corporation tax at 20% and taking a modest wage, plus dividends from the company, they save on both income tax and NI.
But abuse of the tax rules is estimated to help around 20,000 public sector workers who should pay equivalent taxes to other workers avoid on average over £3,500 a year in income tax and National Insurance contributions.
In future, the public sector body employing the worker will be responsible for deciding whether income should be taxed in the normal way as employment income, rather than leaving it up to the individual worker. New guidance will also be published to make it clearer when employment taxes should be paid.
A government source, quoted in the Telegraph, said:
Personal service companies can be legitimate, but we estimate that 90 per cent of people who should comply with the rules, don't.
Some may not understand the rules but it's clear others are using them as a way to minimise their tax bills. You have situations where someone working in a public body pays thousands of pounds less in tax than someone doing exactly the same job alongside them who's taxed as an employee.
That can't be fair either on the taxpayer or their fellow workers. We are going to put a stop to it.
Furthermore, IPSE, the Association of Independent Professionals and the Self Employed, have argued strongly that George Osborne should implement the findings of the aforementioned Self-Employment Review, as opposed to simply commissioning such a report as a sop to the self-employed. They are asking the Chancellor to commit to fair maternity pay, simpler taxation, and more accessible training opportunities.
In a letter to the Chancellor ahead of next Wednesday's Budget, IPSE CEO Chris Bryce said: "This group (self-employed workers) makes an indispensable contribution to the UK economy, and with record numbers of people working this way, it's a group that cannot be overlooked.
Furthermore, Mr. Bryce called for the consideration of the Freelancer Limited Company' concept to give self-employed workers more secure employment status. He said: The current tax system is complex, time-consuming and burdensome for the smallest businesses.
The recent Office of Tax Simplification report of small business taxation rightly highlighted the need to make tax simpler for small businesses. It recognised the Freelancer Limited Company (FLC) a concept developed by IPSE as an idea worth considering further' to give freelancers more certainty around employment status.
On the subject of maternity pay (an estimated 270,000 freelancers and self-employed workers are mothers, according to IPSE), Mr. Bryce called for a "level playing field", noting: "The Chancellor needs to act on the Self-Employment Review's recommendation to level the playing field, and make sure the self-employed get the same maternity pay as employees. New mums should never be held back from going freelance particularly as it can provide a much better work-life balance than employment.
IPSE is also calling for better access to training for self-employed workers, something we wholeheartedly agree with here at Kingsbridge. Mr. Bryce said: Access to development opportunities is key for the self-employed to do business. Employees currently receive tax-deductible rates on all training, but the deductions only apply to the self-employed if the training is deemed to be a core' skill. This means, for example, that a self-employed plumber pays a disproportionately high amount for training in company branding or self-marketing. The Chancellor should use the Budget as an opportunity to make this training more affordable by making training tax-free for employees and the self-employed alike.
What else are those in the contracting community calling for? The latest Report on Jobs from REC (the Recruitment and Employment Confederation) notes how contractor demand continued to outstrip availability in February, further intensifying the already existing skills shortage. Whilst such data shows that contractors are set to continue enjoying a contract-rich market, REC chief executive Kevin Green warned that some potential hurdles could damage the economy and impact contractor demand. "Serious threats are looming just around the corner, he noted, alluding to the March Budget and upcoming tax changes. The REC calls on the government to avoid further destabilising the UK jobs market.
Contractors should also hope to see a rethink on April's Travel & Subsistence legislation, harsh in its potential to hit both umbrella and PSC contractors. As ContractorUK noted recently: "More than 50 MP's have signed a joint-letter urging George Osborne to use Wednesday's Budget to end the sticking plaster' approach taken towards contractors and contracting. Prominent figures from the Tories, Lib Dems, SNP and Labour, including Treasury Select Committee member Helen Goodman MP, all signed the letter, organised by PRISM." They go on to note: "It is time for government to conduct a strategic review to end the sticking plaster approach, bring clarity and give all types of workers a fair deal and equal recognition."
The contracting community will hope for more delays in response to the IR35 'discussion document' designed to improve the effectiveness of the rule for the exchequer. For now, all that we know is that the government "continues to be interested" in IR35. There also appears to have been a delay in the programming and release of a new ESI tool, which was originally scheduled for April 2016 and has now been moved, in beta version only, to "spring 2016." It's fair to say that if nothing about IR35 appears in next Wednesday's Budget, contractors and the self-employed will be happy.
Finally, contractors shouldn't expect a completely smooth ride when it comes to their personal finances. Although rumours in the run up to the 2015 Autumn Statement of contractors being forced to join the payroll after a month or two appear to have been unfounded, April's withdrawal of dividend tax credits, the introduction of new restrictions on expenses, and a stamp duty levy for those buying a second property or buy-to-let has left many contractors hoping George Osborne will simply leave them alone on 16th March.
Of course, there may be more surprises just around the corner. Whatever happens, join us on the 16th on Twitter as we break down the Budget in real time, and look out for our round-up blog post later in the day. What are you expecting to happen next week? Let us know in the comments below, or join the debate over on our Twitter, Facebook, and LinkedIn pages. If you're a contractor looking for insurance, simply give one of our friendly customer services team a call on 01242 808740, or visit our website to get an immediate quote.