Autumn Statement Key Outputs
The Chancellor of the Exchequer, Philip Hammond, has today presented his first Autumn Statement to Parliament.
The Autumn Statement was the Chancellor’s first opportunity to outline his priorities for taxes and spending in the wake of the Brexit vote. PM Theresa May has previously commented that the Chancellor will “lay out an agenda that is not just ambitious for business, but ambitious for Britain. He will do more to boost Britain’s long-term economic success. He will make sure Britain, outside of the EU, is the most attractive place for business to invest.”
The flexibility of the UK labour market makes it an attractive place to create jobs and it is this flexibility that has been crucial to recent economic recovery, allowing firms to hire quickly or tailor their staff levels to meet customer needs. I was therefore eager to hear what announcements would be made today to recognise and support the UK’s flexible workforce, particularly given the need for our economy to remain resilient as we withdraw from the EU.
IR35 Reform in the Public Sector
IR35 reform within the public sector is the key announcement today impacting contractors and the recruitment businesses which place them. There has been a significant period of HMRC discussion and consultation on what changes they should make to IR35 to improve perceived levels of non-compliance within the public sector. Despite unanimous opposition to the changes proposed by HMRC during the summer, the Government has decided to press on and introduce them on 6 April 2017.
Therefore, from April 2017 the entity which pays the contractor’s limited company (most likely to be either the public sector body or a recruitment agency) will become responsible for assessing IR35 and deducting the resulting tax from payments made to the limited company.
As a result, if you are a contractor working on an assignment for a public sector client, from April 2017 you may see PAYE tax being withheld from the payments your company receives if your client or recruitment agency believe that you are caught by IR35. This doesn’t mean that you are no longer able to contract through a limited company but your take home pay may be affected if your public sector client or agency believes you are working on an assignment caught by IR35.
It is difficult to say at this stage what precise impact these changes will have as it is likely to be very much dependent upon how the company (public sector client or agency) which pays your limited company interprets the IR35 rules and their attitude to risk. At one end of the spectrum a risk adverse recruitment agency may take a blanket view that PAYE will be withheld from all payments made to limited company contractors working on a public sector assignment. At the other end of the spectrum a recruitment business could fully consider the IR35 position to ensure their contractors continue to be paid in the correct way. A contractor’s willingness to accept an assignment in the public sector may now be driven by the engagers approach to IR35.
Issues to be ironed out over the coming months include clearly defining what a public sector client is, how PAYE (which is a personal tax) can be withheld on payments made to a limited company and how contractors who disagree with the IR35 opinion or obtain an alternative opinion from their advisor can submit an appeal and reclaim any tax overpaid.
Brookson’s current view on this is that we now need to see public sector bodies and recruitment agencies who supply contractors to the public sector deciding how they are going to react to these changes and ensure that they keep their contractors updated to enable them to make informed decisions prior to the changes coming in. We would encourage contractors working through a limited company with an assignment with a public sector end client to obtain an up to date IR35 opinion to enable them to consider their options post April 2017.
Contractors working in the private sector will not see any changes to the current IR35 regime.
VAT Flat Rate Scheme
The government will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses. Currently, businesses determine which flat rate percentage to use by reference to their trade sector. HMRC have published a technical note regarding this proposal and it appears from that document that the new FRV rate of 16.5% will apply to a “limited cost trader”. The definition of a limited cost trader is yet to be agreed but the initial proposal is to base this on a business which incurs costs on “goods” (excluding food and drink consumed by the business or its employees / director, vehicles, vehicle parts, fuel and capital expenditure) of less than 2% of VAT inclusive turnover or of less than £1,000 a year. We would expect some limited company contractors to fall inside this definition and therefore have to pay FRV at the higher rate of 16.5% from 1 April 2017.
There will be a short period of consultation before the legislation is finalised which will commence on 5 December 2016 so the final legislation may not be published until March 2017.
We are disappointed by this change as it is appeared to be targeting the abuse of the FRV scheme in certain sectors where a limited company is used solely for the purpose of accessing the FRV benefit for a worker who is caught by IR35 e.g. teachers. However, genuine contractors across all market sectors will be impacted and appear to be being asked to foot the bill for non-compliance.
Employee Business Expenses
The government will publish a “call for evidence” at Budget 2017 on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer. From what we can currently see, this does not appear to be aimed at limited company contractors but it has the potential to inadvertently impact them and we will be keeping an eye on how this evolves.
Disguised Remuneration Schemes
Budget 2016 announced changes to tackle use of disguised remuneration schemes by employers and employees. The government will now extend the scope of these changes to tackle the use of disguised remuneration avoidance schemes by the self-employed. This will ensure that self-employed users of these schemes pay their fair share of tax and National Insurance. Again, whilst not seemingly targeted at limited company contractors, this has the potential to inadvertently impact limited company contractors and will be keeping an eye on how this evolves.
HMRC Support for Emerging Insolvency Risks
HMRC will develop its ability to identify emerging insolvency risk, using external analytical expertise. HMRC will use this information to tailor its debt collection activity, improve customer service and provide support to struggling businesses. We are aware that over the last 4 or 5 years, HMRC have not been as proactive as they used to be in chasing limited companies which fail to pay their tax bills on time. This threat of HMRC becoming more proactive in the future should encourage more limited company contractors to manage their company finances better and engage with their accountant if they get into financial difficulties in advance of HMRC debt collection activity commencing.
Tax Rates and Allowances
We welcome the Government’s commitment to reducing corporation tax rates in the UK to 17% by 2020. This will benefit genuine contractors. We also welcome the on-going increases to the personal allowance enabling taxpayers to retain additional money whilst tax rates remain stable.
For more detailed information on changes to tax allowances and other specific tax measures announced today please see our Autumn Statement 2016 Summary Guide.
Unfortunately, there is not much in the way of positive announcements to support the flexible workforce. Whilst I am pleased to see the government taking some action to tackle non-compliant working practices in the flexible labour market I am disappointed that the measures being brought in will financially impact genuine contractors.
There will be lots of detail to review when the draft legislation, to support all these measures, is published (likely to be on 5 December) and I will produce a further blog shortly after this with my thoughts. The general flavour of today’s announcement is that the Government recognise that the world of work is changing, the labour market is becoming more flexible and there are many different ways of working and further changes may be around the corner. Whilst there appears to be little ability to influence HMRC I think it’s important, now more than ever, for everyone involved in the flexible labour market supply chain to work together to act in the best interests of the sector, cut out non-compliant activity around the edges and remind Government at every opportunity of the value of the compliant end of the market.