In his debut Autumn Statement, the Chancellor announced a number of plans that will affect your contractor and micro-business clients. Emily Coltman FCA, Chief Accountant to award-winning cloud accounting software provider, FreeAgent, investigates.
From the moment the Chancellor mentioned “rising incorporation and self-employment eroding tax collection” in the early part of his Autumn Statement speech, we at FreeAgent suspected that there may be some bad news for micro-business clients lurking in the full report – and it appears we were not wrong. A new high VAT flat rate for service-based businesses
From 1st April 2017, “businesses with limited costs, such as many labour-only businesses” will have their VAT flat rate percentage increased to 16.5%.
A technical note published on 23rd November by HMRC indicates that this will not be as simple as an increase in rate to trades that currently use the 14.5% rate. Instead, clients will need to check how much they have spent on goods, compared to how much they make in sales, to see whether they have bought enough goods not to have to use the 16.5% rate.
Unfortunately, this feels like a very real complication to a scheme that was originally designed to simplify VAT for small businesses.
IR35 reform for the public sector confirmed
The Chancellor did not mention IR35 in his speech, and searching the full documentation for the term told us nothing, as “IR35” was not explicitly mentioned. However, we were very interested to read the following announcement about “off-payroll working rules”:
“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.” … “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.”*
This raises the question of whether a public sector organisation will simply pay all of its contractors as employees in order to avoid any penalties for non-compliance. In that scenario, contractors would be taxed as employees but would not be entitled to employment rights, such as paid holidays and pension – the worst of both worlds.
The one positive point to note is that the government is not yet extending these “off-payroll working rules” to contractors who work in the private sector – but who knows whether that is yet to come?
Making Tax Digital: the elephant in the room?
As the public consultation on Making Tax Digital only closed a few weeks ago, we were unsure whether there’d be any news on it in the Autumn Statement. In the end, the only mention of the initiative in the full Treasury report was:
“In January 2017, the government will publish its response to the Making Tax Digital consultations and provisions to implement the previously announced changes.”*
It will be interesting to see what changes, if any, are made to the original plans for Making Tax Digital, based on the responses to the consultations – if the responses are ignored then this could potentially be very frustrating and disappointing to many in the profession.
Penalties for tax avoidance enabling
The Autumn Statement report confirms that: “…the government will introduce a new penalty for any person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC.”… “The government will also remove the defence of having relied on non-independent advice as taking ‘reasonable care’ when considering penalties for any person or business that uses such arrangements.”
The somewhat worrying element of this is that it appears to expect accountants to predict the future and to have prior knowledge of which “tax avoidance schemes” will later be defeated by HMRC. This would certainly be a concern in the scenario of a borderline case.
Remove tax and NI advantages of salary sacrifice schemes
From April 2017, tax and NI advantages of salary sacrifice schemes will be removed, except in the case of childcare, cycle to work schemes, pensions (and relevant advice), and ultra-low-emission cars. There will be transitional arrangements for existing schemes, which will remain in place until April 2018, or April 2021 in the case of salary sacrifice arrangements for cars, accommodation, and school fees.
Alignment of thresholds for employee and employer NI
From 6th April 2017, the thresholds for employee and employer NI, currently at £155 and £156 per week respectively, will be aligned at £157 per week. This will make payroll calculations easier, if nothing else!
Class 2 NICs to be abolished
It’s been confirmed that from April 2018, Class 2 NIC will be abolished altogether, with self-employed clients deriving entitlement to State Pensions through Class 4 and voluntary Class 3 NICs.
Since it represents a simplification, this is potentially positive news, though it remains to be seen whether it will also cost taxpayers more in the form of an increased rate of Class 4 NIC.
Looking ahead: government vs contractors? Reflecting on this year’s Autumn Statement, there were, admittedly, a couple of pieces of good news for micro-businesses. Increased finance is being made available for exporting, additional funds are being made available to borrow through the Small Business Bank, and Corporation Tax remains on track to fall to 17% by 2020.
However, when it comes to its latest set of announcements for contractors, I cannot help but wonder if this Autumn Statement shows that the current government simply does not support contracting as a way of working.
*The emphasis here belongs to FreeAgent.