Today saw the release of the Draft Finance Bill 2016. After an Autumn Statement surprisingly devoid of any mention of changes to IR35 rules, despite significant pre-Statement speculation to the contrary, most members of the contracting community expected to see changes announced in today’s draft Bill. However, IR35 was once again conspicuous by its absence.
Any proposals for change that may have been happening behind government walls are staying there for the time being. The Draft Finance Bill did include the changes to tax relief on Travel and Subsistence expenses where a contract is inside IR35 that were announced in the Autumn Statement. However, the lack of any IR35 reform suggests the government took heed of the advice of the stakeholders they consulted, as well as the overwhelmingly negative reaction to the proposed changes from the contracting community as a whole.
In a letter received by Nick Holmes, CEO of Umbrella.co.uk, and timed to coincide with the release of the Draft Finance Bill, the Chancellor stated: “We will be considering this issue carefully before taking any further decisions. Should any further changes be introduced they would be subject to detailed consultation before publishing any draft legislation.”
Whether this means that the Government are simply biding their time, or whether they have abandoned their plans for IR35 reform altogether, remains to be seen. It seems now that all eyes have moved to the next Budget statement on 16th March 2016.
The Bill goes on to clarify a few grey areas, including a commitment to implementing the dividend tax rise without introducing any kind of relief for those who are likely to be hit hardest (predominantly those directors whose earnings are towards the lower end of the scale).
As mentioned above, the changes to Travel and Subsistence expenses will come into effect from 6th April 2016. Although those with a contract inside IR35 will no longer be able to benefit from claiming Travel and Subsistence expenses, the changes do not apply to all contractors as had been previously feared. However, according to Contractor Calculator, the tax relief restriction is still likely to affect around 430,000 contractors over the course of a year.
The policy paper goes on to state that: “Those individuals who supply their services through small limited companies, generally known as PSC’s will no longer be able to claim tax relief or a NICs disregard for those contracts where they are required to operate the intermediaries legislation (commonly known as IR35), or they would otherwise be operating IR35 if they weren’t receiving all their remuneration as employment income.”
Amongst other key measures covered in the Treasury’s Draft Finance Bill 2016 overview, the government plans to clamp down on contractors who have used remuneration schemes in order to reduce their tax liability. It will also go ahead with the majority of recommendations made in the Office of Tax Simplification’s ‘Employment Status Review’, and confirmed a penalty for the General Anti-Abuse Rule (GAAR) of 60% of tax due as a disincentive for engaging in tax avoidance schemes. Of note, too, is HMRC’s plan to push ahead with reforms designed to modernise tax administration, meaning self-employed contractors will have to submit returns online on a quarterly basis.
We believe there are still some areas that would benefit from clarity: Umbrella companies will be governed by the Supervision, Direction or Control test and the employment intermediary will need to decide whether that test will apply in every case. PSC’s, however, will only be governed by IR35 legislation, and anyone caught within IR35 will be unable to claim Travel and Subsistence expenses. It’s likely that many will perceive this as an extra penalty for operating within IR35, likely causing even fewer people to comply with the legislation.
Given that HMRC recently estimated that only around 10% of contractors who are caught by IR35 legislation actually comply with it in the first place, linking the removal of Travel and Subsistence relief to IR35 seems counterintuitive, and will likely lead to a fall in the capture rate well below the current 10% figure.
What did you make of today’s Draft Finance Bill? Did you expect more information on IR35 reform? Let us know in the comments below, or over on our Facebook, Twitter, and LinkedIn pages. If you’ve got any questions about what insurances you need, or if you’d like to take out a policy, you can head on over to our website or call us on 01242 808740.