Budget 2018: Contractor Preview

Budget 2018

Fright Night for Contractors and Freelancers?

It’s that time of the year again. No, not Halloween. The Budget. But that’s not to say that there won’t be a few scares in the Chancellor’s big red box come 29th October. So what might leave contractors and freelancers waking up in a cold sweat in the middle of the night this time around?

Firstly, the fact this year’s Budget is a little earlier than normal (it normally takes place in mid-to-late November) has set a few alarms bells ringing.

It could be nothing, and it may well be an attempt to get ‘distractions’ out of the way before pressing on with the real business of Brexit, but there is speculation that an early Budget date has been put in place in order to give the government time to perfect the launch of the heavily rumoured private sector IR35 reforms.

It’s almost a certainty that private sector IR35 reform will happen in either April 2019 or April 2020, with the BBC’s Kamal Ahmed noting that “the Treasury is finalising plans to overhaul tax rules which allow self-employed people [in the private sector] to avoid paying national insurance contributions.”

He goes on to note that “the move will be targeted at people who set themselves up as private companies to take on work.”

Given that the official government line is that the ‘off-payroll working’ rules introduced in the public sector have raised £410 million a year in extra tax, and given that they need to find an extra £20 billion to cover the funding pledges they’ve made to the NHS over the next five years, it seems inevitable that any rollout will be sooner rather than later. More on that later.

Axe the Tax

More broadly, it is extremely likely that we’ll see tax hikes and the reduction of tax breaks across a number of areas as the government seek to put gauze on the wound that is the NHS deficit. Expect to see pensions tax relief high on the list of cost-saving targets, alongside other tax-efficient investments and thresholds.

It appears likely that business relief will be on the chopping block, no longer allowing entrepreneurs to pass down businesses with up to 100% tax inheritance relief. Shares in unquoted companies will be similarly impacted.

The Synthetic Self-Employed

Most pertinently, however, is the Chancellor’s planned tax crackdown on what the Treasury has termed the ‘synthetic self-employed’ – private sector IR35 reform, in other words. It’s generally a cause for concern when a government department coins a new pithy epithet for a group of workers, and this is no different. PSCs, it seems, are very much in the crosshairs this October.

The Treasury believes that one-third of people claiming self-employed status are actually ‘disguised employees’ and, as such, should be paying more tax. Without the proposed reform, it suggests, non-compliance with tax rules could cost HMRC £1.2 billion a year by 2023.

With rumours suggesting that firms which use personal service company contractors will be made to take legal responsibility for ensuring ‘off-payroll’ workers stick to IR35 rules it doesn’t take a genius to connect the dots. As with the initial public sector rollout many firms may simply decide that it is not worth the effort or risk and will place a blanket ban on contractors, forcing them to either seek alternative employment or recant their independent status.

Many in government see this as the less politically controversial option, the (more lucrative) alternative being a freeze on personal income tax allowances despite a Tory pledge in 2017 not to do so, but they have underestimated the reaction of contractors in the past and were forced into an embarrassing climbdown after attempting to increase national insurance contributions from the self-employed in 2017.

HMRC’s clear intention to bring IR35 reform into the private sector is at best ill-advised, especially if the aim is to launch next year. As IPSE’s Deputy Director of Policy Andy Chamberlain noted:

“Businesses will not be ready to implement such a measure in April 2019. If the chancellor does push ahead with this, he will be flying in the face of the very businesses he pledged to support less than two weeks ago at the Conservative Party conference.”

Pause for Thought

We must also consider the counter-argument, however. The fact that IR35 public sector reform, unveiled in late November for a start the following April, was widely accepted to have been rushed does give the opportunity for some breathing space. Even HMRC dropped their stonewalling and accepted that such a quick rollout led to teething problems and costs.

Since that poorly managed launch HMRC has seen a number of IR35 case defeats and has had the effectiveness of its CEST tool questioned, both factors which could see any private sector reform put on hold. Should there be a conspicuous silence, it would likely be explained away by the government having to deal with Brexit.

It would be sensible to pause on any reform given that the ongoing employment status review should be completed before any changes are made. Furthermore, with Brexit causing uncertainty for businesses across the UK it seems counter-intuitive to introduce measures that will damage one of our country’s greatest advantages – our flexible economy.

This debate should not obscure the fact that there are some very real issues with non-compliance and IR35 that need to be tackled, but now is not the time to make all contractors and freelancers in the UK the whipping boys when the actual problem exists within a small minority.

As many have called for previously, the first step should be a through impact assessment of public sector IR35 reform. Ultimately, the steps taken in that area led to 71% of public sector projects being cancelled or delayed as a result of talent leaving, as well as the NHS losing half of their flexible staff in 25% of their departments.

This surely wasn’t the intention when the reform was announced and, in order to avoid similar crises in the private sector, time must be taken to decide whether it is necessary and, if so, that any launch is managed properly.

It wouldn’t be a surprise to see a response to the private sector consultation released in tandem with the Budget papers next Monday. What that response might be is difficult to predict. Let’s just hope a little more thought has been given to the bigger picture this time around.

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