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How could Rishi Sunak`s proposed tax increases affect contractors?

It’s putting things mildly to say that coronavirus has left something of a dent in public finances. According to a report…

Author Photo by Kingsbridge

It’s putting things mildly to say that coronavirus has left something of a dent in public finances.

According to a report by the BBC, the government expected borrowing for the current financial year to stand at around £55bn for the whole year. Instead, it borrowed £128bn in just the first three months. Figures released by the treasury in August put spending approved to support businesses, individuals, and public services during the fallout of COVID-19 at around £190bn so far.

That includes the Job Retention Scheme, the Self-Employment Income Support Scheme, the Small Business Grant Fund, the Coronavirus Business Interruption Loan Scheme and countless other financial measures. And, to top it off, last month the UK economy was revealed to be in recession.

This means that Chancellor Rishi Sunak has an unenviable, seemingly impossible task ahead of him: try to recoup money to plug the gaping black hole in public finances, and do it without upsetting voters. It’s already known that the private sector IR35 reforms will be launching in April 2021 and are believed by the Treasury to be a revenue generator.

However, rumours have also been circulating that Sunak plans to recoup some of the COVID spending by increasing certain taxes.

This is not entirely unexpected. When announcing support for the self-employed back in March, he intimated that tax increases would be a consequence of contractors wanting similar support to employees. Despite this, though, it will still present a dilemma for the Chancellor as it is a move that would be bound to upset many, including his own party’s MPs.

If he does nothing, the government will be unable to carry out its manifesto pledges, but if he raises taxes he could potentially alienate swathes of voters.

So, what are the proposed increases, and how could they affect contractors?

Corporation tax

According to reports Sunak is looking to raise corporation tax by 5%, taking it from 19% to 24%. This would raise around £12bn next year and £17bn the year after, while still being lower than many other European countries such as Germany and Italy. However, it’s still a risky move as business leaders warn it could stave off post-pandemic recovery.

It could also put off foreign investment, which the country will need post-Brexit.

For limited company contractors, this would mean a larger tax bill on profits, which would certainly sting for many who argue they have not received adequate support during the crisis as it is.

Capital gains tax

It’s also rumoured that Sunak wants to raise capital gains tax so that it’s in line with income tax. This would mean that the tax on profits gained by selling assets would rise from 10% to 20% for basic rate taxpayers, and from 20% to 40% for higher rate taxpayers. It’s likely the Treasury would position this as making taxation fairer by removing the discrepancy between earned and unearned income.

So, for instance, for contractors who have been hit financially by the pandemic, selling off business assets could be an attractive way to raise short-term funds. However, a capital gains tax increase could make this much less worthwhile.

However, this would likely hit middle-income earners – a category which many contractors fall into – the most and therefore could be an unpopular move for the government.

Dividend tax

The other reported tax increase that would affect contractors is a rise to dividend tax. Many limited company contractors pay themselves dividends (alongside a small salary) as it’s more tax efficient – 7.5% tax rather than 20%. The rise would allegedly make the two more equal and would effectively mean limited company contractors are taxed as employees, (regardless of IR35 status) but without any of the benefits such as sick pay or annual leave.

This again would be a risky move for the Chancellor, especially considering the Conservatives ridiculed a similar proposal by Labour under Jeremy Corbyn’s leadership. It would raise necessary funds, but potentially at a huge cost to the government.

Should I be worried about tax increases?

Right now, it’s worth paying attention to the financial news, but you shouldn’t worry at this stage. Currently, Rishi Sunak is still deciding what path to take, and he has a fine line to tread. Right now, the rumours are just that – rumours – and no one knows what he will do. Tax rises would be unpopular with the government’s own backbenchers, business leaders, and a large proportion of their own voters.

It’s even been reported that the Prime Minister does not think they should happen for a couple of years, if they have to happen at all. There is also the risk that a tax hike could hamper economic recovery efforts, which would be counterproductive.

Kingsbridge’s Andy Vessey had this to say on the reports:

The talk is of a hike in corporation tax (CT) is from 19% to 24%. That would, of course, affect PSCs whose income is untainted by IR35. For those PSCs adversely affected by Covid-19 in 2020 however, they probably won’t really feel the pinch until 2022 as any increase in CT would be effective for accounting periods ending after 31st March 2021. For example a company with a year ending December 2020 would pay CT on 01/10/21 and at 19%. Assuming the company’s profitability increased in y/e 31/12/21, 9 months of its profit would be chargeable at 24%. and CT would be payable on 01/10/22. 

Recent changes have already been made to Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and Principal Private Residence. On 14th July the Office of Tax Simplification (OTS) launched a call for evidence as part of the Chancellor’s request for the OTS to carry out a review of those aspects of CT that relate to chargeable gains. It will therefore be no surprise if further changes are announced in November. 

What can I do?

There’s very little you can do about tax increases. It’s really a case of if they happen, they happen. It’s much more beneficial to work with the things you can control.

One of those things is the IR35 reforms. It’s pretty much a certainty that they will go ahead in April 2021. The government want to recoup revenue and, since the legislative changes were already on the agenda, they now have renewed vigour to push ahead.

However, this shouldn’t be a worry for you as there are things you can do to limit the effect of IR35 on you and your business. For instance, Kingsbridge’s IR35 Protect insurance will provide you with cover for taxes, interest and penalties from HMRC, as well as status enquiry defence costs should you find yourself under investigation.

But – and here’s the clever part – come April next year, the policy flexes to cover whoever holds the tax liability within the contractor supply chain. This makes you a safe bet for end clients and fee payers scared of IR35 because it essentially removes the risk, making you a much more attractive prospect.

So, keep an eye on those proposed tax increases, but don’t let them worry you. Instead, focus on the things you can control by speaking to our experts on 01242 808740.

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