Budget 2016 Analysis: ‘A Budget That Backs Small Business’

Budget 2016

George Osborne’s latest Budget as Chancellor passed today as expected, with no real surprises. There was good news for the self-employed, but the spectre of a clampdown on the use of Personal Service Companies (PSCs) by public sector employees still looms like a heavy cloud.

As we’ve mentioned on these pages before, Osborne’s tightening of the vice on the so-called ‘Paxman tax’ comes predominantly as a result of public outcry at perceived tax evasion by celebrities and sports stars. However, such measures will also impact those contractors working in the public sector, meaning that from April 2017 they will now face investigation from their clients and agencies to confirm whether they are ‘true contractors’ or simply a ‘disguised employee’. If the client or agency believes that the contractor in question is a disguised employee, it will be required to deduct tax at source from all payments made.

“In every budget I have given action against tax evasion and avoidance has contributed to the repair of our country’s finances, and this budget is no different,” the Chancellor began by saying. “In the Red Book we set out in detail the action we will take to shut down disguised remuneration schemes…Public sector organisations will have a new duty to ensure that those working for them pay the correct amount of tax rather than giving a tax advantage to those who choose to contract their work through personal service companies (PSCs).”

As section 2.40 of the Red Book notes:

“From April 2017 the government will make public sector bodies and agencies responsible for operating the tax rules that apply to off-payroll working through limited companies in the public sector. The rules will remain unchanged for those working in the private sector. The government will consult on a clearer and simpler set of tests and online tools.”

The “online tool” mentioned here is a likely reference to the long-speculated ESI tool, which was originally scheduled for April 2016, was then moved, in beta version only, to “spring 2016″, and now seems to be back in a period of consultation (essentially meaning a decision has yet to be made). Change is afoot, it seems, but not quite yet. Whatever form that change takes, we echo the concerns raised in IPSE’s analysis of the Budget: any new rules must be fair to contractors in the public sector.

As Martin Hesketh at Brookson noted:

“This specific targeting of contractors in the public sector is surprising as there are already rules (Treasury Directive issued August 2012) which required the public sector body to seek assurance from certain contractors that they are paying the correct amount of tax. Given today’s announcement it appears as though the current regime is not seen as robust enough to tackle HMRC’s perceived problem with non-compliance within the public sector.”

It seems, for now at least, that those contractors working in the private sector will not see any changes to the current IR35 setup, although this may well change in the future if the government is indeed taking a piecemeal approach to amending the legislation.

Although significantly less than the 3% rise initially rumoured, the decision to increase Insurance Premium Tax (IPT) by another 0.5% is disappointing, with the rise likely mean yet another cost to doing business.

Osborne’s Budget did contain some better news for the contracting community. “A Budget that backs small business” was the soundbite that seemed to resonate most, and there were a number of welcome announcements, including:

– A promise to abolish class 2 National Insurance Contributions for the self-employed by 2018.

– A rise in tax free personal allowance to £11,500 from April 2017, along with a raise of the higher rate threshold to £45,000.

– Good news for those contractors working in the oil and gas industry. The sector will have its supplementary charge of 10% halved, alongside the abolition of the petroleum revenue tax – a measure designed to stimulate exploration and investment in a key Scottish industry.

– The business rate relief threshold for small businesses will rise from £6,000 to £15,000 from 1st April 2017.

– An increase in the ISA savings limit from £15,000 to £20,000.

– A lifetime ISA for under 40’s enabling them to save £4,000 a year will be introduced in April 2017. For each £4 saved the government will contribute £1 of their own. There will be no tax upon withdrawal, and the funds can be accessed at any time for a small charge, with a “generous and completely flexible limit” of £20,000.

– The HS3 rail link between Manchester and Leeds has been given the go ahead. Crossrail 2 is also to be commissioned by the Government. Such introductions are very welcome and should go a long way to increasing UK productivity, as well as providing more jobs for contractors.

As is often the case, there may be more change in the days ahead. We’ll be keeping a close eye on any developments and will update the blog as soon as anything relevant comes through. In the meantime, let us know what you thought of the Budget in the comments below, or over on our Twitter, Facebook, and LinkedIn pages.

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