The first Conservative-only Budget in 19 years took place in the House of Commons yesterday and whilst there were some positives, the Tories announced a number of changes which will undoubtedly affect contractors in a negative way, with contractor dividends, expenses, and IR35 among the areas targeted by the Chancellor.
Chris Bryce, CEO of IPSE, noted: “The combination of the action on dividends, clamping down on travel and subsistence and potentially toughening up IR35 legislation could leave many contractors feeling pretty sore.”
Contractors who pay themselves in dividends will be hit hard, with the dividend tax credit now being replaced with a new tax-free allowance of £5,000. In addition to this, contractors who own limited companies will no longer be able to claim NICs Employment Allowance under the new measures. Presently, any contractor operating a Personal Service Company (PSC) can offset the allowance, usually set at £2,000, against the NIC on a salary – this will no longer be possible.
Although the Chancellor is right to target aggressive tax avoidance and evasion, his focus on PSC’s risks many self-employed people being wrongly targeted if they are confused with those abusing the system. We hope that the Government’s consultation allows an opportunity to separate legitimate small businesses from the abusers.
Following on from the March 2015 Budget, a consultation document has been published outlining plans to remove tax relief on travel and subsistence expenses, in particular for contractors who are “supervised, directed, and controlled” – although this shouldn’t affect Kingsbridge clients working through their own limited company.
In addition to this, there will now be a programme of IR35 reform designed to improve its effectiveness in protecting against disguised employment, with the government wanting to “find a solution that protects the Exchequer and improves fairness in the system.”
The Treasury writes in its Summer Budget 2015 document: “The government recognises that many individuals choose to work through their own limited company. However, where people would have been employees if they were providing their services directly, [the IR35] anti-avoidance legislation introduced in 2000 requires that they pay broadly the same tax and National Insurance as other employees. As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough. Non-compliance in this area is estimated to cost over £400 million a year.”
The government intends to “start a dialogue with business on how to improve the effectiveness of existing IR35 legislation” in the near future. Once this is underway it is imperative that the review is conducted fairly.
The CEO of ContractorCalculator, Dave Chaplin, has noted: “Our greatest fear is that the consultation will ignore the contribution of IR35’s greatest stakeholder – contractors.” The announcement on IR35 is one that is sure to unnerve the contracting community, and all should be aware that complacency is no longer an option regarding potential IR35 liability.
Thomas Wynne, Head of Business Development at Kingsbridge Contractor Insurance, commented that the increase in Insurance Premium Tax (up from the current 6% to 9.5% from November 2015) “is frustrating, especially given that the insurance industry has been working as hard as possible to bring essential insurance costs down.”
There were more positive changes worth mentioning – notably the previously announced tax breaks for the North Sea oil industry will go ahead, leading to a cut in taxes worth £1.3 billion.
Although reducing the UK’s budget deficit is undoubtedly necessary, we echo the concerns Chris Bryce at IPSE raised when he noted that “legitimate businesses may be unfairly hit by the Chancellor’s efforts to tackle tax avoidance and changes to tax on dividends.”
Kingsbridge Contractor Insurance provides business insurance to over 18,000 freelancers, contractors, and independent professionals. If you’d like to get an instant quote, or simply want to discuss your options, head on over to kingsbridge.co.uk or give us a call on 01242 808740. What did you make of the Budget announcement? How will it affect you as a contractor? Let us know in the comments below, or over on our Facebook and Twitter pages.