Crystal Umbrella

Contractors working through umbrella companies and limited companies alike may support the PCG’s ringing endorsement of the recent budget.

Acknowledging that the retention of IR35 had disappointed many contractors, PCG’s Managing Director John Brazier was nonetheless upbeat about the Chancellor’s other measures. The PCG has produced a detailed guide identifying those measures which affect contractors in particular. Written by tax expert Ann Redston, Visiting Law Professor at King’s College, the document pinpoints the benefits for contractors contained in the Budget.

These include the 1 per cent reduction in the small profits rate of Corporation Tax, which is likely to help “nanobusinesses” such as freelance contractors to re-invest and expand their capabilities, as well as the increase in mileage allowance by 5p per mile and the cut in fuel duty, which comes with a new stabilizer. Freelancers who work for multiple clients across several locations will experience these reforms as a significant boost, the PCG maintains.

Moreover, the PCG applauds the identification of 10 “Enterprise Zones” across Northern and central England, offering simpler planning rules, superfast broadband and, most significantly, 100 per cent rate reliefs. These are designed to attract freelancers away from the traditional heartlands in London and the South East, encouraging to bring their talents further afield.

The £1,000 increase in Personal Income Tax Allowances also came in for praise, especially as a further £630 rise is scheduled for April next year. The measure, the PCG insists, will lessen the tax burden for many freelancers.

Summing up the report, Mr Brazier said that the budget will “make the business climate more favourable for the UK’s 1.4 million freelancers, whose flexible expertise UK plc relies on for its future growth.”

The Chancellor of the Exchequer, George Osborne, will deliver his first Budget later today. It is expected that he will detail the tax rises and spending cuts which the coalition government plan to initiate in order to recover the £153bn UK deficit. There are some specific expectations from this Budget which will have a direct impact on contractors.

IR35

Treasury ministers have already confirmed that more information of the fate of IR35 would be confirmed in due course. Ernst & Young, speaking to Contractor UK, commented: “The proposed review of IR35 is likely to take the form of a consultation document. While a simplification of the provisions would be welcome, there remains a significant tax disparity between carrying on business within a small company and being self-employed. As such, the tension between tax avoidance and administrative burdens is likely to continue at least in the short-term.”

Capital Gains Tax

The expected rise in capital gains Tax has already been confirmed by the new government. It will be increased in line with income tax. High earners will be subject to CGT at a rate of 40% but relief for business assets is expected to remain. The only factor which is, as yet, unclear is when the rise will be implemented.

VAT

Currently VAT stands at 17.5%, however across the EU the average for VAT rates are between 19% and 21%. It could be a possibility that the UK rate is risen to 20% in line with the rest of the EU. However, it is likely that such a rise would be phased in over several years.

Corporation Tax

In the Conservative manifesto they stated their commitment to reducing corporation tax to 25% while further reducing the small companies’ rate to 20%. Since the Liberal Democrats’ manifesto also discussed reductions it is likely that today’s Budget will announce these reductions.

NICs

Employers’ contributions to NICs for those earning £20,000 and above will increase by 1% as proposed by the previous Labour government. However, the NIC threshold for employer contributions is also likely to increase.

Cuts in Public Sector Spending

The Chancellor is likely to announce cuts of between £30bn and £60bn in the public sector. Wages will be frozen over the next year although many public sector workers are likely to face pay and pension cuts. Speaking to Contractor UK, managing director of Parity, Alan Rommel, stated: “ Big IT projects will be stopped where they don’t drive future efficiencies. Several bodies are scheduled to close where duplication occurs or integration can support savings, while projects that don’t demonstrate big returns may also be cancelled.

He concluded: “But hopefully the front line impact will be minimal and efficiency drives the savings. Potentially IT will be required to drive those savings and, if permanent headcount is restricted, the contract market could be required to deliver the skills to generate the savings.”

The Emergency Budget is not due to take place until next month but the new Chancellor is already coming under scrutiny for the proposed plans to taxation. A Sunday newspaper quoted various government aides saying that George Osborne was aware of the public concerns regarding the planned rise in capital gains tax.

The new Capital Gains Tax rate will be up to 40%, up from 18%. Investment house, Fidelity’s Tom Stevens commented: ” CGT always looked like an easy target given the discrepancy between the tax rate on earned income and capital gains so it is not surprising that it is first in the politicians’ sights.”

The increased tax rate is likely to have a more severe effect on savers which means there is likely to be an increase in people seeking tax-shelter investments such as ISAs. However, it is still unclear when this rise will come into effect. It could be applied from the date of the Emergency Budget or it may be held off until 6^th April 2011. The least popular option, though, is likely to be the retrospective application of this tax rise where it will be effective from 6^th April 2010.

The government has confirmed that there will be “generous exemptions for entrepreneurial business activities”. How these exemptions will be applied is likely to be amongst the main focus areas for the government over the next few weeks.

The aides told the Sunday Times: “There are a range of possible options on capital gains tax. It will be important to take the time to get this right.”

The newly appointed Chancellor of the Exchequer, George Osborne, has announced the date of his Emergency Budget. The new coalition government had stated that it would host an Emergency Budget within 50 days and the date has now been set for June 22^nd. It is expected that when the Budget is delivered it will contain tax rises and spending cuts.

Under the Labour government, tax receipts were considerably less than government spending on the whole. It is, therefore, no surprise that the fiscal finances are in a bad way. Of course, this issue was compounded by the global economic crisis which means that this government has a huge deficit to recover. This is sure to result in some unpopular decisions at the Budget on 22^nd June.

It is expected that George Osborne will detail how he plans to cut £6bn in public spending. Of course, this is just the beginning. It is likely that he will also announce tax increases. The first tax increase is expected to see VAT increased from 17.5% to 20%. Also, as Capital Gains Tax rates on non-business assets currently sits at 18%, this is likely to be increased to approximately 40%.

However, the Conservative manifesto laid out plans to decrease corporation tax rates. Small companies can expect to benefit from a 1p cut in their rate – down to 20p from 21p. The Liberal Democrats had laid out plans to increase the lower threshold of income tax to £10,000. This is unlikely to happen in all at once under the coalition government. Instead it is likely there will be an incremental increase over the term of the government.

The Chancellor presented his Budget last week and industry and society have been left analysing what the after effects of this Budget will be. Now, the Forum of Private Businesses has conducted a snap poll which has found that 95% of smaller businesses feel disappointed by last week’s budget. Only 5% of respondents feel that their businesses can develop under the conditions laid out by Mr Darling. A further 87% actually stated that these conditions will do nothing to increase consumer and business confidence despite a thriving business community being a priority due to the country struggling to recover from recession.

Speaking about the results of their snap poll, chief executive Phil Orford commented: “This research appears to support our initial assessment of the Budget – overall, it fell far short of what we were hoping for and there was a sense that it was very much a Budget for the election. Judging from the feedback our members have given us, smaller firms don’t feel that the Chancellor laid the foundations for a better environment in which to do business. At the same time, they’re not taking the Budget too seriously because of the imminent election.

He concluded: “However, there were some specific measures included in the Budget which should help some SMEs – things like the creation of a credit adjudicator for small firms, the extension to HMRC’s Time to Pay scheme and new targets aimed at helping small businesses get more public sector contracts. As long as they are administered properly, these schemes should provide tangible, on-the-ground support to smaller firms and the Forum’s members appear to appreciate that.”

The Chartered Institute of Taxation has sent a letter to the Chancellor of the Exchequer requesting that he does not rush through any taxation changes without the necessary scrutiny in parliament. As the date of the election has now been set as 6^th May, CIOT are concerned that the Finance Bill will be rushed through without due care for any possible consequences. They have asked the Chancellor to ensure that he only includes any measures which are absolutely necessary in terms of raising revenue. CIOT have asked that a post election Finance Bill be considered for more complex taxation changes.

CIOT President Andrew Hubbard stated in his letter: “The CIOT strongly believes that good tax law requires close examination and detailed scrutiny, from parliamentarians and from outside experts. In particular this is to ensure that the legislation does not have unintended negative consequences. A Finance Bill rushed through all its stages in a single day does not allow for this – especially in the final days of a Parliament when most MPs’ minds will, understandably, be elsewhere.”

Back in 2005, the pre-election Finance Bill resulted in 106 clauses which were rushed through the necessary parliamentary processes in just four hours. Only the first 13 clauses received any debate.

May 5^th is the cut off date for Income Tax renewal, which is require din order for income tax to be collected. However, this can be postponed for 3 months through Budget resolutions until such times as the Finance Bill passes. The difference is, this extension does not apply when a dissolution of Parliament occurs as is the case this year with the upcoming General Election.

Many IT contractors will be feeling the effects of some of the announcements made in yesterday’s Budget. Alongside the Chancellor’s unveiling yesterday, a press notice titled ‘Protecting Tax Revenues’ was also released. This announced fresh attacks on offshore and payroll schemes that are designed to exploit loopholes in tax legislation. The press notice stated: “The government is taking further action to change the game for those seeking to bend or break the rules on tax.” To this end, legislation will be introduced from 6^th April 2011.

Commenting on this development, consultant365.com’s Ray McMahon told Contractor UK: “There has been an increase in these schemes, which offer increased take-home pay by various methods, over the recent years. It appears ‘disguised payments’ is an area the government wants to tackle. Businesses have just over 12 months to consider whether to continue with these schemes”.

The notice also details plans by the government to take action on any other vehicles where employment income is not properly taxed. The Chancellor also made clear his determination to clamp down on those individuals not paying tax on their offshore gains and income.

Mr McMahon commented: “Where people have moved their money ‘offshore,’ HMRC will consider settlements with tax geared penalties which could be increased up to 150% or even 200% of the liability.”

Mr Darling also made it clear that he plans to stop any companies taking advantage of the double taxation treaties in this country by over-claiming tax relief. New measures will be introduced to combat this issue from the 1^st April, including “principles-based approaches to protect Exchequer revenues.”

Schemes offering contractors maximised take home pay are also under scrutiny and stricter measures. The notice said: “ a measure countering avoidance involving the release of loans to participators by close companies [so]…close companies will be denied a corporation tax deduction for releases or write-offs of loans to participators.”

Mr McMahon warned: “This comes into force from today. [It will apply] where a director takes a loan from the company and then it is written off. Although there was a benefit and NICs to pay, it was considerably less than having to pay off the original loan.”

It is expected that this combination of measures on avoidance and evasion will raise an extra £1.5 billion, with an expectation of £4bn by 2012-13.

Many businesses will, however, be pleased to acknowledge that the Time To Pay facility will actually remain for the next five years.

Martin Hesketh of contractor accountancy firm, Brookson said: “”The Budget was quite friendly to business in terms of small and medium-sized enterprises, but it wasn’t particularly great for freelance or contractor companies. That said, the measure that seems directly to benefit contractors is the extension of the Time to Pay scheme, assuming contractors are in trouble with cashflow and need extra time to pay.”

HMRC have also confirmed that their Employer Compliance Review has been re-engineered. This is the route which is normally adopted during an IR35 investigation. Bauer and Cottrell stated: “HMRC say that they are on target to reduce audits and inspections by 15% by 2011. This is all clearly in line with the marked reduction in investigation work and IR35 cases over the last 18 months.”

As contractors await the Chancellor’s Budget today, managing director of accountantcy firm Brookson, Martin Hesketh, has stated that he believes Alistair Darling must pay particular attention the effect of his Budget on Britain’s flexible workforce.

Mr Hesketh wrote: “The chancellor Alistair Darling faces a tough day on 24th March as he delivers a budget upon which Labour will be judged in the next general election, potentially weeks away. The Pre-Budget Report in December was set against the backdrop of an extremely negative economic climate and even though consumer confidence appears to be returning, the British economy is still very fragile. There’s no dispute that more needs to be done if the Government continues to pledge it will halve the budget deficit in four years, but with a general election so close, I have my doubts as to whether Mr Darling will deliver further blows to the general public.”

He continued: ““However, I wish the same could be said for professional, skilled consultants and the flexible workforce. The Government continues to view the consultancy community as a relatively small number of people which is not the case. In December 3.25m* people in the UK were freelance professionals. The economic downturn forced companies to rely on contractors and flexible workers during the toughest periods of the recession as full-time staff were shed. So while the Government calls for skilled professionals to step forward they contradict themselves by continuing to target self employed and high earners with hefty taxes. If the Chancellor decides to further increase income tax on salary brackets under £150,000 the consequences would be highly detrimental to the economy and growth of a skilled UK workforce.”

Mr Hesketh concluded: ““The pre-budget report proved that the Chancellor falls back on the approach of taxing the wealthy, but with a general election looming, whatever decisions he makes will undoubtedly come under further scrutiny.”

The country is waiting patiently for the Chancellor of the Exchequer to deliver his Budget Report on Wednesday 24^th March, particularly in light of its proximity to the expected general election in the coming months. However, contractors who are hoping for to benefit from in this Budget will probably be left disappointed. IR35 has long been a contentious issue but despite the oppositions pledge to overhaul the taxation system to make it fairer for all, it is unlikely that Alistair Darling is set to follow suit. In fact, in terms of taxation, it would appear that the only changes in the imminent Budget will be a delay in the planned rise in Corporation Tax for small businesses. Contractor groups have been lobbying on the issues relating to IR35 and compliance for some time now but, as yet, these campaigns have failed to effect change.

It seems the reason tax cuts are particularly unlikely to be announced next week is due to the massive debt currently strangling the UK’s finances. The Prime Minister has already spoken out to confirm that there is a need for the public sector to become more efficient but the likelihood is actually that this means there will be large cuts in public spending, although such announcements will probably be made after the election, therefore will be dependent on which political party is in power. As of next week, we will have a better idea of the financial position over the coming twelve months if Labour win another term.

Wednesday’s Budget offered no dramatic changes for contractors, with the notable exception of those with high incomes, who will face restrictions on pension contributions and possibly higher income tax. Some agendas, like the call to terminate IR35, as well as several issues regarding umbrella companies and expenses, were notably absent from the Chancellor’s Budget.

Contractors who might potentially benefit from the budget changes include those active in the energy sector, as a range of measures were announced to support North sea oil and gas extraction and exploration, as well as funding and support for renewable energy schemes. Small businesses may find their corporation tax returns simplified, if the government decides to implement initiatives to that effect outlined in the Budget. Additionally, the previously announced rise of corporation tax to 22% will not happen, and it will remain at 21%.

The only contractors who will be decidedly negatively affected are those with an annual income in excess of £100,000, who will face restricted relief on their pension contributions as well as seeing their ‘tax-free’ allowance of £6,475 being reduced to zero; and those earning over £150,000 per year, who will additionally pay 50% income tax from 2010.

Some experts expressed criticism of the Budget’s lack of detail as a possible excuse to re-introduce schemes now deferred, as well as the Chancellor’s apparent refusal to address the IR35 issue. However, as it stands the majority of contractors will remain largely unaffected by the new Budget and have no cause for concern.