The new coalition Government published its programme last week, giving an abbreviated preview of the issues which the Chancellor will be addressing more fully in his Emergency Budget on 22nd June. The devil, of course, will be in the detail but it’s nonetheless possible to glimpse some key points. Here are some of the more prominent ones.
The notorious tax regulations embodied in IR35 came into force in 2000, when the previous government wanted to close a tax loophole. Prior to IR35, a number of individual contractors were paying appreciably less tax and national insurance simply by offering their services through a limited company. In effect, they were working full-time for a single employer but keeping much more of their income than an official employee doing identical work on PAYE. The aim of IR35 was to prevent contractors from setting up as a limited company whilst working long-term for the same employer.
However, the legislation soon ran into controversy, seemingly unable to distinguish accurately and consistently between bona fide contractors and those who were ducking and diving through the loophole. John Brazier, Managing Director of the Private Contractor’s Group (PCG), has condemned it as “a dreadful piece of legislation” which crudely caught everyone in the same net and encouraged HMRC to view every legitimate freelancer as a potential tax evader.
The new government’s published programme signals its intention to “review” IR35 and replace it with “simpler measures that prevent tax avoidance but do not place undue administrative burdens or uncertainty on the self-employed, or restrict labour market flexibility.” The news was quickly welcomed by PCG and many contractors will approve of the government’s plan to set up an Office of Tax Simplification. Whilst further details may become clearer in the June Emergency Budget, the issue is likely to go through a lengthy consultation process before decisions are finalised. Even so, proposals aimed at simplifying taxation matters for the self-employed should be cautiously welcomed at this stage, especially if they lead to the creation of better defined and fairer guidelines to avoid being deemed ‘employed’ when legitimately contracting.
Other issues of interest to many of our customers include the following.
By now it’s no secret that the coalition plans to curtail government spending by £6.2 billion within the financial year 2010 – 2011. The cuts will, the coalition insists, be directed at ‘non-front-line services’. Again, the Chancellor’s Emergency Budget will spell out rather more clearly just what this means.
Changes to Setting Up Limited Companies
The government’s bureaucratic simplification mission extends to this area, too. A new ‘one click’ method for registering companies is proposed, a measure which is likely to include all the labyrinthine tax aspects associated with new registration. On the topic of setting up and sustaining viable small businesses, there is also a commitment to devise assured means of keeping their life blood – the ready supply of credit from the banks – flowing efficiently. To help facilitate this, a major new loan guarantee scheme will be considered.
Specifics are as yet still thin on the ground, but corporation tax rates are set to be reduced and the processes around corporation tax reformed.
Review of Capital Gains Tax
This one might cause a few sharp intakes of breath: a fairly hefty increase looks likely, but it’s not clear yet precisely how this will impact on different classes of investment or asset. What we do know is that the government plans to tax non-business capital gains at rates resembling those currently applied to income and that it believes there will be substantial exemptions for entrepreneurial business activities. Capital distributions made on the winding up of Limited Companies may well be affected by this.
Changes to National Insurance
The Conservative Party in opposition advocated an increase in employee National Insurance thresholds as a means of preventing the previous government’s proposed “jobs tax” and the new government is set to adopt this measure. National Insurance rates are also to be revised.
Increases to Personal Allowance Threshold
Lower and middle income earners are intended to be the chief beneficiaries of this measure. A generous increase in the personal allowance is planned for April 2011, paid from two sources: the extra revenues generated by increases in Capital Gains Tax for non-business assets, and the money that would have been used to fund the increase in employee National Insurance contributions. In the longer term, the government has set a target of £10,000 for the Personal Allowance.
Even though this isn’t specifically mentioned in the programme, it would be premature to suppose that no action will follow. Predictions from financial commentators are almost unanimous that VAT will rise to 20%, with some even expecting it to rise to 22%. The timing of any increase is unclear at present but as a rise in inflation is feared presently, some suggest that this may not be immediate. Others, however, expect the rise to be immediate – we’re simply going to have to wait and see on this one.
A proposal which will be welcomed by millions is the government’s promise to implement much more robust consumer protections vis-à-vis the banks, including the abolition of egregiously unfair bank and transaction charges.
Amongst a raft of measures aimed at actively promoting equal pay and removing workplace discrimination is a promise to extend to all employees the right to request flexible working arrangements. Business will be consulted on the best way of proceeding with this.
Watch This Space for News of the Emergency Budget
Readers can rest assured that Crystal Umbrella will be keeping a close eye on all Budget-related news, ensuring that you’re fully up-to-date with all the developments. As soon as it’s released, we’ll be sending you a summary of the Budget’s key points.