Contracting sector unimpressed by 2013 Budget’s minimal action to promote growth

Contractors can expect few immediate benefits and little support for growth from the 2013 Budget, according to leading contracting experts. Many of Chancellor George Osborne’s 2013 Budget measures designed to support small businesses may ultimately benefit contractors, but not in the immediate future.

“There are some great measures for small businesses, including contractors, but most are too far into the future to have any impact,” observed ClearSky Accounting's managing director Derek Kelly.

PCG head of public affairs Simon McVicker believes the Budget does nothing to promote contracting and freelancing: “Many of measures announced yesterday would not come in until three years down the line, and will not change the underlining dire situation in the economy.”

Contractor accountant Abbott Moore James Abbott agrees, adding: “There is nothing in the Budget that really helped the average contractor, and measures such as the General Anti-Avoidance Rule (GAAR) may have a negative impact.”

ContractorCalculator’s CEO Dave Chaplin also feels that contractors have been let down by this year’s Budget: “Where Chancellor George Osborne falls short is in his failure to create an imaginative growth strategy for the economy.”

Mark Dexter, managing director of specialist information management recruiters KDR Recruitment, was cautiously optimistic: “This was a reasonable budget for small businesses and any lack of confidence in economic growth risks becoming self-fulfilling.”

2013 Budget summary for contractors

According to contracting sector experts, measures impacting on contractors include:

• The extension of IR35 to include office holders was confirmed. Currently, it is believed that few contractors will be affected
• The personal allowance will increase to £10,000 a year early in April 2014. However, the higher rate tax allowance is correspondingly reducing, leaving most contractors no better off
• A penny off corporation tax by April 2014, plus merging the two existing rates will directly benefit contractors, particularly those with more than one company who previously suffered from paying two tax rates on their company profits – but the measure is a year away
• The £2,000 employer’s National Insurance Contributions (NICs) allowance takes 450,000 small firms out of paying the tax, but few contractors will be affected. Salaries may become more attractive for some higher earning contractors, depending on the detail of the scheme, and ‘one-person umbrellas’ may also benefit
• Extending relief on childcare could place more money in the pockets of some contractors, but most limited company contractors with children already use childcare vouchers. It is potentially of significant benefit to umbrella contractors whose service providers don’t run childcare schemes
• The General Anti-Avoidance Rule (GAAR) will enable HMRC to tackle business models having the primary purpose of tax avoidance. But experts fear HMRC could extend GAAR’s provisions to apply to limited company contractors, as well as to more high-risk offshore schemes
• Other anti-avoidance measures will impact on those contractors using offshore employment service schemes. Most of the schemes specifically mentioned in the Budget are likely to be unfamiliar to contractors
• Sectoral, infrastructure and housing initiatives will indirectly benefit contractors through increased numbers of contracts, but it could take years for these contracts to trickle through the supply chain
• Extension of the beneficial loan interest limit to £10,000 from £5,000 will benefit contractors with directors’ loan accounts.

Budget measures identified by contracting experts as notable by their absence were:

• A visionary growth strategy to tackle the fundamental issues facing the economy
• Further simplification of the tax system by merging the collection of income tax and NICs
• Simplifying IR35 in general, and specifically providing guidance on the implementation of the office holders rule
• An expenses rules review to tackle perceived abuses by umbrella companies
• Anything directly to promote flexible working in general, and contracting and freelancing specifically.

But contractors should be grateful for sum Budget absences: “I’m glad the Chancellor did not introduce temporary measures such as a cut in VAT. Such initiatives sound great, but are short-term and have a massive impact on systems and processes,” says Kelly.

Business measures welcomed, but not soon enough

“The Chancellor’s pro-business measures sound great, and some business organisations are delighted,” notes Kelly. “But apart from sounding good, are they actually going to do anything today and tomorrow? No, because most of the pro-business measures are years away.

Kelly is also concerned that the new NIC allowance could potentially spawn a new avoidance industry: “When combined with the VAT flat rate scheme (FRS), alongside no pension and Agency Workers Regulations (AWR) requirements, the new NIC allowance potentially makes one-person umbrella companies more attractive. The government has already indicated that if the VAT FRS is abused, it will be removed.”

According to Chaplin, who has already started work on ContractorCalculator’s interactive online tax and finance calculators, tinkering with corporation tax, personal allowances and NICs will have a marginal impact on contractor finances. He points out that: “Apparent contractor gains from Budget measures will largely be eroded by persistent inflation and fiscal drag.”

Dexter, however, is pleased with the measures to support small firms, and believes they will have a positive impact on the recruitment sector, which in turn will benefit contractors: “The recruitment industry was hurt badly by a lack of confidence in 2008 when the economic crisis began. As with all Budgets, the devil is in the detail, but this was a Budget to inspire cautious optimism.”

No manifesto for growth

In contrast, Abbott’s view is: “This was not a Budget to inspire consumers to spend and businesses to invest. For example, no government has ever managed to stimulate a housing boom through policy measures.”

McVicker agrees, adding: “I don’t think the Chancellor has the imagination to tackle the underlying problems. The industry stimulus schemes will result in clients hiring more freelancers, particularly where they add most value when supporting innovation.”

McVicker also singles out the shale gas and North Sea decommissioning measures as being of specific value to engineering and oil and gas contractors. However, he warns that: “The little action announced on construction and infrastructure is three years down the line. We need something now.”

Despite the poor macroeconomic conditions and growth forecasts, Kelly sees contractor demand slowly increasing: “Many businesses have put off change in the hope of seeing the economic outlook improve. However, to stay competitive and become more profitable, organisations need to implement improvement projects and upgrade systems.”

Avoidance measures could be damaging

Although Dexter’s agency takes a tough line with tax avoidance and does not do business with offshore providers, he agrees that further tax simplification is required: “If the rules were fair and totally clear fewer contractors would feel the need to go offshore.”

Abbott in particular is concerned about the proposed anti-avoidance measures: “Most of the schemes tackled in the Budget just won’t be on the average contractor’s radar, or their accountant’s for that matter.

“But GAAR is an unknown quantity at the moment and from now on contractors should be cautious about taking tax planning decisions that may be construed as avoidance.”

Kelly is emphatic that GAAR is not needed and that HMRC should be enforcing the comprehensive rules it already has: “GAAR might result in HMRC deciding that contractors should pay the highest amount of tax, not the tax they should pay according to the legislation. This is wrong.”

McVicker believes that tax avoidance is likely to move further up the government agenda. He points out: “In order that it can present a fiscally neutral Budget that does not pay for giveaways to consumers and businesses with more borrowing, the government has set itself significant targets for increasing tax through its anti-avoidance actions.”

Chaplin sums up the general feeling among those contracting sector experts interviewed by ContractorCalculator: “On balance, the Chancellor is guilty of lacking imagination and courage to take bold decisions on simplifying tax and freeing up the growth potential of the UK’s contracting workforce.”

As further detail emerges on the new schemes heralded by this year’s Budget, ContractorCalculator will bring you the latest expert interpretation and calculator updates.