By Andy Vessey
Second Budget not what contractors needed
Yesterday, George Osborne delivered the first all Conservative Budget in 19 years and freelancers may be wishing he had just stuck with the one in March given the quartet of bleak announcements that he made that will be harmful to PSC's.
Taxation of dividends reform
The current system of tax credits on dividends was designed over 40 years ago and the Chancellor believes the dividend tax credit is an arcane and complex feature of the tax system. So from April 2016 the dividend tax credit will be replaced by a new tax free dividend allowance of £5,000 per year for all taxpayers. There will then be new rates of tax on dividend income above the allowance:
- 7.5% for basic rate taxpayers;
- 32.5% for higher rate taxpayers; and
- 38.1% for additional rate taxpayers.
For a government that wants to simplify the tax system this is hardly the way to go about it!
One of the rewards for contractors taking on the risk that self-employment brings and building up their business, has been the ability to extract profits by way of low salary and high dividends thereby minimising their tax liability. With the imposition of a 7.5% tax, whilst this will not dissuade such a future strategy (still preferable than paying a collective 25.8% employees/employers NIC on salary), it is nevertheless a kick in the teeth.
The government believes that these changes will “start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities.”
The rates for higher and additional rate payers is nothing new but the dividend tax for basic rate taxpayers is, so for many freelancers they will have to bite the bullet on this one.
NIC Employment Allowance
The recently introduced Employment Allowance that enables employers to reduce their annual NIC bill by £2,000 is to increase to £3,000 from April of next year. However, for companies where the director is the sole employee, they will not be able to claim the allowance as from April 2016.
Improving the effectiveness of IR35
Sound familiar? Still discontented with the inefficiency of IR35, the government has asked HMRC to begin a dialogue with business on how to improve the effectiveness of the current IR35 legislation. A discussion document is due to be published shortly.
Restricting tax relief on travel and subsistence
Following on from the announcement made in the March Budget, a consultation document has been published, 'Employment Intermediaries and Tax Relief for Travel and Subsistence', detailing proposals to restrict tax relief for workers engaged through an employment intermediary, such as a PSC or Umbrella company.
As from April 2016 the government's intention is that where a worker is supplying their personal service to an engager and is under the right of supervision, direction or control of any person, then tax relief to travelling (including subsistence) expenses will be denied.
Certainly the travel expenses rules needed to be tightened up for Umbrella companies who were gaining a distinct advantage over normal employers but to penalise PSC's in the same manner is just unfair and simply reinforces the notion that the government view PSC's as a tax avoidance vehicle, especially with the introduction of the new dividend tax.
With HMRC reducing its manpower resources, how is this going to be policed? These measures will require the Revenue to examine the working relationship between contractor and end client so it would be more cost effective to do this as part of an IR35 enquiry. However, HMRC are only committed to 250 new IR35 investigations each year.
There was some better news with the announcement that corporation tax will be reduced to 19% in 2017 and 18% in 2020.
The Office of Tax Simplification, which will now be established as a permanent office of the Treasury, will be commissioned to review the taxation of small companies.
As part of its commitment to raise the personal allowance to £12,500 by the end of this parliament, the allowance will increase by £400 to £11,000 in the 2016/17 tax year and then to £11,200 in 2017/18.
The higher rate tax threshold will rise from £42,385 to £43,000 in 2016/17. A further increase in 2017/18 will see the band set at £43,600.
New inheritance tax measures, to be introduced from April 2017, will see the family home being taken out of inheritance tax for all but the wealthiest with a new transferable nil-rate band. This will apply when a main residence is passed on death to direct descendants, such as a child or grandchild. The allowance will be up to:
- £100,00 in 2017/18;
- £125,000 in 2018/19;
- £150,000 in 2019/20; and
- £175,000 in 2020/21.
This is in addition to the nil-rate band, currently £325,000.
The government will legislate to set a ceiling for the main rates of income tax, standard and reduced rates of VAT and Class 1 NIC (employer and employee) rates, ensuring that they cannot rise above their current levels.
All in all though, not a good day for freelancers who will be left with more uncertainty about what the IR35 future holds. The right of control test has been favoured in recent legislation as the sole test of an agency worker's employment status and is to be used in deciding whether or not travel expenses qualify for tax relief. Could this be a future signal that IR35 will be simplified to also rely on this test alone?
Published July 2015