In last week’s Budget the Chancellor vowed to “protect the jobs and livelihoods of British people” from the impact of the covid crisis. His plans included extensions to the job support schemes and various initiatives to boost business productivity. Meanwhile, a number of tax hikes will help pay for the unprecedented cost of covid support. With the dust settling on the red book, the Budget brought a mixed bag of news for contractors.
Most noticeable in its omission from the chancellor’s speech was any reference to the April IR35 reform. This effectively puts an end to any hope of a last-minute U-turn and acts as a clear signal that the reform will go ahead as planned. With only one month to go, hiring firms and agencies who aren’t already doing so should make preparations.
Despite the considerable opposition, it’s unsurprising that the chancellor won’t budge on IR35 reform given the cost of the pandemic. The government is expecting to raise up to £2.9billion by 2024 from the IR35 clampdown. While they view this as good for the struggling economy, those representing the contracting and freelance sector have pointed out the likely short-sightedness of reform when it comes to building financial stability.
The IPSE, which has continued to campaign against the reform, commented: “Pressing ahead with making it harder than before for big business to hire flexible workers due to the poorly understood, and poorly implemented off-payroll rules, while we start to recuperate from covid, and in the context of a newly independent UK after Brexit, will still seem like folly to many.”
Despite the Off-payroll blow, it wasn’t all bad news for contractors and freelancers. There were no raises to Income Tax, National Insurance, Annual Exemption for Capital Gains Tax, the VAT registration threshold, Inheritance Tax limit and VAT rates. The freeze to the income tax thresholds and personal allowance from 2022 until 2026 means that income tax payable will rise as salaries rise. Although contractors with profits over £50,000 will be caught by a Corporation Tax increase due in 2023, from 19% to 25%, many contractors can mitigate their tax liability through pension contributions etc.
It’s also reassuring for contractors that no changes were made to Business Asset Disposal Relief (previously Entrepreneurs Relief). This means that contractors wishing to close their limited companies via a Members Voluntary Liquidation (MVL) will still be paying tax at a rate of 10% on the assets and cash on closure. This could benefit many contractors who are closing their limited companies and switching to an umbrella payroll in preparation for IR35 reform.
Fortunately, there was no news of plans to review taxation of the self-employed. The idea of a review was raised within the House of Commons Treasury Committee’s ‘Tax after coronavirus’ report. While the possibility can’t be taken completely off the cards for the future, the government have obviously decided that it’s not the right time to hit the sector with yet more upheaval.
After all, it’s been an exceptionally tough year for contractors, most of whom have found themselves excluded from the financial support schemes. An estimated 3.8million people haven’t been eligible for furlough, or the self-employment grants. Acknowledging at least a part of the problem, the Budget saw new starters, who were previously unable to claim SEISS, made eligible for grants, providing they completed a tax return for 2019/2020. This should bring a further 600,000 people into the support scheme.
Unfortunately, pressure to throw limited company directors a lifeline went unheeded by the chancellor, despite persistent lobbying. The Budget was make-or-break time, but there was no mention of help. Asked why he’d chosen to abandon limited co directors, the chancellor cited concessions such as Universal Credit, bounce-back loans and furlough for their PAYE income, adding that despite the proposals put forward, “there just isn't a workable option."
On balance, the Budget held few surprises for contractors and there’s the general opinion that while it could have been better, it could also have been a whole lot worse. While IR35 reform continues to pose a real challenge from next month, contractors won’t also have to contend with the threatened tax raid. No doubt the government aren’t expecting the implementation of the new IR35 rules to go off without a hitch, particularly given the legislation’s often ‘vague’ outlining of how certain things will work in practice. HMRC will need to conserve its resources, while making sure reform doesn’t deliver a blow to business at a critical time.
This content has been supplied by IR35 Guru
With IR35 reforms less than 4 weeks away, limited company contractors need to take the appropriate steps now to ensure they are ready for the changes. From April 2021 it will be the end-client who will determine whether or not the contract is inside or outside IR35. Umbrella Exchange can assist those who are still unsure of their options to keeping their contracting career on track. To talk to a member of our team, call: 0203 393 3881.