Contractors are facing a ‘reinforced’ IR35 regime from April 2012, with the Budget 2012 documentation showing that new anti-avoidance measures will be introduced in the Finance Bill 2013 to tackle users of personal service companies.
Buried in the Budget 2012 documentation, this ominous announcement with few details clouds an otherwise positive Budget for contractors. Chancellor George Osborne’s opening statement was that “...this Budget will reward work…it unashamedly backs business and is on the side of aspiration.”
Before focusing on the very slightly more positive macroeconomic picture of increased growth forecasts, the Chancellor went on to say that the Budget would create “…far-reaching tax reform, with a simpler tax system, [and make the UK] more competitive for business than any other country in the world.”
All of these words should provide comfort for genuine contractors running limited companies and working through umbrella companies. And the silver lining in the news about the reinforcement of IR35 is that, if the lead from the IR35 Forum is taken, genuine contractors should not be concerned.
How the Chancellor’s bold statements translate into actual fiscal benefits for contractors are detailed below.
Highlights of the 2012 Budget – so far
IR35
From the Budget document: “The Government will introduce a package of measures to tackle avoidance through the use of personal service companies and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include:
- Strengthening specialist compliance teams to tackle avoidance of employment income
- Simplifying the way IR35 is administered; and
- subject to consultation, requiring of?ce holders/controlling persons who are integral to the running of an organisation to have PAYE and NICs s deducted at source by the organisation by which they are engaged. (Finance Bill 2013).
Corporation tax
- No changes to the ‘small profits’ rate of corporation tax paid by contractor limited companies set at the last Budget
- Headline corporation tax rate will fall to 24% from April 2012, and by 2014 it will have fallen to 22%
- Consultation on cash basis for calculating tax for small unincorporated businesses up to £77k – this may impact on contractors who are not trading via limited companies.
Income taxes
- Personal allowance grows to £9,205 next April – an increase of £1,100
- The higher rate threshold will reduce to £32,245
- The government plans to consult on the consolidation of income tax and National Insurance Contributions (NICs)
- Taxpayers will receive an annual personal statement showing them what their tax pounds are being spent on, their average tax rate and their total income tax and NICs
- The 50% additional rate of income tax will reduce to 45% from April 2013, and the dividend additional rate will be reduced from 42.5 per cent to 37.5 per cent.
Property, pensions, savings and investments
- New stamp duty land tax of 7% on properties worth more than £2m
- Tax-free pension contribution allowances remain unchanged
- Tax reliefs will be capped
- Capital gains tax will be imposed on residential property held in “overseas envelopes”.
Avoidance and evasion measures
- A General Anti-Avoidance Rule (GAAR) would improve “our ability to tackle tax avoidance without compromising our competitiveness”, says the Chancellor, so the government will consult on introducing one for the 2013 Budget.
Travel and lifestyle
- Vehicle Excise Duty (VED) increased by inflation, with additional benefits for fuel efficient vehicles
- VAT exemptions to remain on food, children’s clothes and books.
Other measures that may impact on contractors
- £1bn of alternative finance for the UK’s ‘Mittelstand’ of mid-sized businesses to ensure they have the finance to grow – this could encourage investment that would provide new contract opportunities
- Expanding UK export finance to help small firms supply products and services to overseas clients
- Working with the Chinese government to develop London as an overseas trading centre for the Chinese currency
- The fund to provide up-front money for housing construction firms is being expanded
- Introducing tax changes for the North Sea, ending uncertainty over decommissioning tax relief, and introducing new allowances for large and deep fields to open up west of Shetland
- Tax breaks for media and IT contractors working in the digital content creation, video games and animation industries
- Bank levy rate increases to offset the benefits of reduced corporation tax on the financial sector.
Further analysis of the implications of this year’s Budget for contractors and expert commentary will be published by ContractorCalculator soon.