Autumn Statement – 23/11/2016
There were quite a lot of changes announced in the Autumn Statement on 23rd November 2016 which will affect the small business and contractor community. We’ve summarised them here.
Public Sector IR35 is happening (now called Off-Payroll Working)
IR35 reform within the public sector is the key announcement impacting contractors and the recruitment businesses which place them. There has been a significant period of HMRC discussion and consultation on what changes they should make to IR35 to improve perceived levels of non-compliance within the public sector. Despite major opposition to the changes proposed by HMRC during the summer, the Government has decided to press on and introduce them on 6 April 2017.
Therefore, from April 2017 the entity which pays the contractor’s limited company (most likely to be either the public sector body or a recruitment agency) will become responsible for assessing IR35. These bodies may take an overly cautious approach and decide that IR35 applies to all their clients and thereby deduct the resulting tax from payments made to their limited company contractors.
As a result, if you are a contractor working on an assignment for a public sector client and your client or recruitment agency believe that you are caught by IR35, from April 2017 you may see PAYE tax being withheld from the payments your company receives. This doesn’t mean that you are no longer able to contract through a limited company but your take home pay may be affected.
Also, if your contract is deemed caught within IR35, tax relief on travel and subsistence expenses would not be allowable through your limited company.
Please note, the way IR35 is assessed is not changing, the entity responsible for making the assessment (and bearing the risk) is.
Contractors working in the private sector will not see any changes to the current IR35 regime.
It is difficult to say at this stage what precise impact these changes will have as it is likely to be very much dependent upon how the company (public sector client or agency) which pays your limited company interprets the IR35 rules and their attitude to risk.
Issues to be ironed out over the coming months include how PAYE (which is a personal tax) can be withheld on payments made to a limited company and how contractors who disagree with the IR35 opinion can submit an appeal and reclaim any tax overpaid.
We now need to see public sector bodies and recruitment agencies who supply contractors to the public sector deciding how they are going to react to these changes and ensure that they keep their contractors updated to enable them to make informed decisions prior to the changes coming in.
Further clarity and detail is expected 5 December 2016 and subsequent draft legislation is expected to be subject to consultation and apply from April 2017.
Agencies do not want the burden and risk of IR35 dumped at their door. Whilst they are the party paying the contractor, they are also the party furthest from the reality of the engagement – which is ultimately what IR35 revolves around. However, they are also acutely aware of the risk of losing highly skilled workers. This is why we genuinely believe many agencies will do their best to implement a process which will not penalise contractors who are working compliantly. It is in everyone’s interest.
VAT Flat Rate scheme changes
The government will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses. Currently, businesses determine which flat rate percentage to use by reference to their trade sector.
HMRC have published a technical note regarding this proposal and it appears from that document that the new FRV rate of 16.5% will apply to a “limited cost trader”.
The definition of a limited cost trader is yet to be agreed but the initial proposal is to base this on a business which incurs costs on “goods” (excluding food and drink consumed by the business or its employees / director, vehicles, vehicle parts, fuel and capital expenditure) of less than 2% of VAT inclusive turnover or of less than £1,000 a year.
We would expect some limited company contractors to fall inside this definition and therefore have to pay FRV at the higher rate of 16.5% from 1 April 2017.
This will virtually remove the benefit of the FRS for contractors, which is used heavily throughout the industry. We would expect that many contractors will either de-register or transfer to the standard Vat scheme.
There will be a short period of consultation before the legislation is finalised which will commence on 5 December 2016 so the final legislation may not be published until March 2017.
We are disappointed by this change as it is appeared to be targeting the abuse of the FRV scheme in certain sectors where a limited company is used solely for the purpose of accessing the FRV benefit for a worker who is caught by IR35. However, genuine contractors across all market sectors will be impacted and appear to be being asked to foot the bill for non-compliance.
Making Tax Digital – no change yet
The Government will respond to the consultations and confirm plans in January 2017.
Corporation Tax – still going to 17% in 2020
It was reconfirmed that Corporation Tax would still be reduced from the current 20% to 17%, effective from April 2020.
Personal income tax allowance will be rising to £11,500 in April 2017. It is promised to go up to £12,500 by 2020. The Chancellor said he intends for the allowance to then automatically go up by CPI inflation thereafter.
Overall increase in total allowances & basic rate threshold to £45,000 (£43,000 2016/2017). Additional tax rate threshold remains unchanged at £150,000.
National Insurance changes
Employer National Insurance Contribution thresholds will change to match the Employee threshold from April 2017, meaning that a tax efficient company director’s salary for next tax year will be £157 per week or £8,164 a year. As previously announced, the Chancellor confirmed that Class 2 National Insurance Contributions will be abolished from April 2018.
Unfortunately, there is not much in the way of positive announcements to support small businesses and the flexible workforce in particular.
Whilst we are pleased to see the government taking some action to tackle non-compliant working practices in the flexible labour market and confirm plans to reduce corporation tax rates, we are disappointed that the measures being brought in for Vat and Public Sector working will financially impact genuine contractors.
There will be lots of detail to review when the draft legislation is published to support all these measures. Consultation will follow and final legislation is expected end of March 2017.
If you would like to discuss these matters in more detail, please feel free to get in touch with us.