It’s almost that time of year again. If you’re a regular reader of the Kingsbridge blog you’ll know that we’ve been following the potential impact of political changes on the contractor community for a while now. Whilst the outlook had seemed quite bleak going into the winter of 2015, following on from a relatively unfavourable summer Budget, the wider picture has become a little rosier since then. An uneventful Autumn Statement was followed up by a Draft Finance Bill surprisingly void of any mention of IR35, which in turn was followed up by Julie Deane’s thorough and balanced Self-Employment Review, arguing for more support for contractors and the self-employed.
So what should contractors expect when the next Budget is delivered on 16th March? There are strong rumours that the Chancellor is planning another increase in Insurance Premium Tax (IPT), up to 12.5%. Given that IPT was raised from 6% to 9.5% in November 2015, if the speculation was true it’d mean that the tax would be doubled in less than six months – a remarkable increase by any standard. Should it go ahead, an increase in IPT could raise as much as £1.3bn for the Treasury in the first year alone.
Such rumour gives credence to the feeling among many that the insurance industry is being singled out, as Treasury minister Harriet Baldwin MP more or less admitted recently in a letter to the AA, stating: “IPT is not a tax on consumers but on insurance companies.” BIBA (The British Insurance Brokers’ Association) also noted that a rise in IPT would discourage customers from taking out policies.
Speculation abounds that the Chancellor will also seek to end the abuse of PSC’s in a crackdown on what many see as an income tax loophole. Pushed firmly into the spotlight by the media in recent months due to the likes of Fiona Bruce and Jeremy Paxman setting themselves up as “one-man companies”, the Chancellor believes that the rules that were designed to help contractors and freelance workers are now widely abused and “completely unfair”.
With an £18bn “black hole” to plug as a result of the significant economic downturn in recent months, Osborne seems set to renew his efforts to tackle tax avoidance. Traditionally PSC’s were used by professional contractors doing short-term work for a number of clients. By paying corporation tax at 20% and taking a modest wage, plus dividends from the company, they save on both income tax and NI.
But abuse of the tax rules is estimated to help around 20,000 public sector workers who should pay equivalent taxes to other workers avoid on average over £3,500 a year in income tax and National Insurance contributions.
In future, the public sector body employing the worker will be responsible for deciding whether income should be taxed in the normal way as employment income, rather than leaving it up to the individual worker. New guidance will also be published to make it clearer when employment taxes should be paid.
A government source, quoted in the Telegraph, said:
“Personal service companies can be legitimate, but we estimate that 90 per cent of people who should comply with the rules, don’t.
“Some may not understand the rules but it’s clear others are using them as a way to minimise their tax bills. You have situations where someone working in a public body pays thousands of pounds less in tax than someone doing exactly the same job alongside them who’s taxed as an employee.
“That can’t be fair – either on the taxpayer or their fellow workers. We are going to put a stop to it.”