Do you know contractors running their businesses through Personal Service Companies (PSCs) contribute £3.5 billion to the UK economy every year? This is a huge figure, but unfortunately the Chancellor and the Autumn Statement this year weren’t in favour of this flexible workforce.
Although Chancellor Philip Hammond, in his first and last Autumn Statement, only fleetingly mentioned the ‘self-employed’, he refrained from speaking on the proposed IR35 reform that is set to come into force in April 2017.
So this confirmed that the recruitment agency/end client will now be held responsible from April 2017 to determine the IR35 status of limited company contractors operating in public sector.
IR35 reform approved
Upon receiving the Autumn Statement after the Chancellor had finished speaking, Paragraph 4.11, page 36 of the Autumn Statement (web version) says:
“Following consultation, the government will reform the off payroll working rules in the public sector from April 2017 by moving responsibility for operating them, and paying the correct tax, to the body paying the worker’s company. The government believes public sector bodies have a duty to ensure that those who work for them pay the right amount of tax. This reform will help to tackle the high levels of non-compliance with the current rules and means that those working in a similar way to employees in the public sector will pay the same taxes as employees.”
This clearly indicates that we will see agencies and public sector bodies applying a risk-adverse approach to steer clear of any issues that HMRC might raise and therefore there’s a high chance of a mass of contractors assessed to be inside IR35 – a problem for contractors. It is predicted this reform will be rolled out in the private sector also but there is no indication of timescale here.
On disguised remuneration schemes
The Chancellor also mentioned that disguised earnings for the self-employed will have a new anti-avoidance focus which will raise £650million.
Paragraph 4.46, page 41 of the Autumn Statement (web version) reads:
“Budget 2016 announced changes to tackle use of disguised remuneration schemes by employers and employees. The government will now extend the scope of these changes to tackle the use of disguised remuneration avoidance schemes by the self-employed. This will ensure that self-employed users of these schemes pay their fair share of tax and National Insurance. (24)”
The Chancellor additionally stated that from April 2017, employers and employees who use benefits in kind schemes will pay the same tax as everyone else. NICs of both the parties will be aligned from spring of next year.
Another blow to public sector contractors
One terrible development announced was the removal of 5% tax-free allowance that every limited company contractors working in the public sector benefitted from.
Paragraph 4.11, page 36 of the Autumn Statement (web version) says:
“In response to feedback during the consultation, the 5% tax-free allowance will be removed for those working in the public sector, reflecting the fact that workers no longer bear the administrative burden of deciding whether the rules apply. (43)”
Although we can’t categorically state the real repercussions of this significant move, this is bad news for the public sector bodies as they are going to face a tough time looking for limited company contractors who are willing to work without the one benefit that was possibly left to them to offset the disadvantages of working as a contractor – 5% tax-free allowance!
More than this, we think it is likely that the public sector bodies will be asked to pay a little more than usual to such off-payroll workers to offset the fact they don’t get any of the benefits that fulltime employees get – be it holiday pay or travel & subsistence costs.
A look at a few positives
On a brighter note, Corporation Tax (CT) will be 19% for the financial years beginning from 1 April 2017, 1 April 2018 and 1 April 2019, and 17% for the financial year beginning 1 April 2020 - the lowest in the G20 and perhaps the best news for contractors in the entire statement. Also, the future looks bright for IT contractors with investment in digital infrastructure and innovation (as long as they are not looking to work in the public sector).
5 December: another important date
We were contacted by HMRC shortly after the Autumn Statement confirming the date of 5 December for publishing the draft legislation, guidance and response to the off payroll worker IR35 reform consultation. There will be a short technical consultation on the legislation.
To read our guide on the other points in the Chancellor’s 2016 Autumn Statement, please head to our website to grab an e-copy.