Contractors faced numerous challenges in 2015, amongst them a raft of new tax legislation introduced by the Government specifically targeting contractors. The looming dividend tax changes means the Treasury will be able to tap into the income of limited company contractors, whilst the contracting sector also awaits the introduction of a ban on tax relief for travel and subsistence costs for some contractors.
However, in a year when taxing the sector appears to have been high on the Government’s agenda, there are still plenty of positives for contractors to draw from 2015.
Whilst another year has passed and IR35 remains law, the outcome is far better than it could have been. At the end of a busy twelve months, in which HMRC toyed with the idea of introducing potentially disastrous changes to the legislation, the Treasury confirmed that it doesn’t intend to further tamper with IR35, until April 2017 at least.
In spite of Government measures enacted in the Summer Budget and the Autumn Statement meaning contracting is slightly less tax efficient than this time last year, it still remains a highly lucrative and popular working arrangement, as highlighted by much research carried out during the year.
IR35 yield prompts Government review, then no action
An ongoing cause for complaint about IR35 administration has been HMRC’s refusal to listen to the input of stakeholders. This is a concern highlighted by ContractorCalculator CEO Dave Chaplin at the beginning of 2015 after HMRC’s IR35 Forum Administration Review revealed no improvement in the implementation of the legislation.
“The [Administration Review] was flawed from the outset because HMRC refused to listen to the external experts on the forum and due to the lack of measurable objectives.”
IR35’s ineffectiveness was confirmed when it was announced that its tax yield had collapsed to just £430,000 during the 2013/14 tax year, from £1.1m in 2012/13, plunging HMRC’s compliance operation into the red, with the legislation costing as estimated £700,000 a year to administer.
Predictably, a review was announced within July’s Summer Budget, with the Treasury anticipating an additional £400m in terms of tax yield from a revamped IR35. The IR35 Intermediaries Legislation discussion document ensued, confirming that the taxman was out of ideas.
HMRC leaves contractors waiting in anticipation
HMRC proposals to impose a new test based on ‘supervision, direction or control’ (SDC) and to force contractor clients to determine IR35 status were deemed potentially disastrous and were fiercely opposed by contracting stakeholders.
Media reports prior to the Autumn Statement sparked concerns that contractors were to be faced with a draconian IR35 crackdown, after the Guardian and the MailOnline claimed that 90% of personal service company (PSC) users would be forced onto the payroll as a result of Government measures.
“The Government is proposing that a consultant using a personal service company would be obliged to move on to the payroll if they work for a business for more than a month. Businesses, rather than the individual, would be responsible for overseeing the rules,” reported the Guardian, which estimated that around 100,000 contractors would be affected.
However, the Autumn Statement passed without mention of IR35, other than in reference to the restrictions imposed on travel and subsistence relief for umbrella company contractors and PSC contractors caught by IR35.
For Seb Maley, Director of contractor tax consultancy agency Qdos, it could be an indication that HMRC ultimately plans to align IR35 with the SDC test: “It is interesting that clause 3.20 of the ‘blue book’ only refers to IR35, rather than SDC. This could indicate that HMRC is intent on adjusting IR35 so it revolves around SDC alone.”
IR35 – no change
The IR35 silence continued with December’s Finance Bill providing no indication as to a likely outcome, until HMRC provided confirmation at an IR35 Forum meeting on 15 December 2015 that it would not be implementing any IR35 changes into the Finance Act 2016, meaning IR35 won’t change until April 2017 at the earliest.
The news was welcomed by contracting stakeholder’s, many of whom saw it as an indication that HMRC was beginning to adopt a more considered approach to the legislation’s administration.
“The outcome is certainly significantly better than many contractors were anticipating,” noted Chaplin. “It looks like the Treasury may be considering the significant tax yield generated by the changes to the dividend tax before making any further decisions over IR35. Whether or not a consultation will take place before April 2017 remains to be seen.”
Employment status clarity still a long way off
Alternate efforts to conclude tax status proved equally fruitless, with the Office of Tax Simplification’s (OTS) Employment Status Review confirming that contractors will face a long haul before any proposed measures to clarify employment status can be evaluated and introduced.
Applying a statutory employment test was amongst the major recommendations made within the report, which proposed adopting one of two approaches:
- A detailed, complex process that would aim to reflect all relevant case law
- A simple or pragmatic set of rules that would have rough edges, but be easy to implement.
Research gathered from other countries concluded that similar tests proved to be complex, time consuming and contentious, leading the OTS to favour a simplified test, the concept of which was dismissed by Chaplin as draconian, dragging in too many contractors genuinely in business on their own account.
HMRC’s Employment Status Indicator (ESI) tool was also called into question, with the OTS suggesting that it requires attention. HMRC has since announced that it intends to review this tool to provide a more reliable way of assessing employment status.
Government policy targets contractors
The Government’s March 2015 Budget looked largely set to benefit the contractor workforce. The proposed abolition of the self-assessment tax return, investment in infrastructure, tax breaks for oil and gas firms and Help to Buy ISAs were amongst the Chancellor’s announcements that were met warmly by contracting stakeholders, albeit with caution.
The Chancellor’s additional Summer Budget in July was far less accommodating, with contractors hit by numerous bombshells. Notably, it was announced that dividend tax was to be reformed, with initial estimates suggesting that basic rate taxpayers would be facing extra tax bills of £2,025 a year.
Fears over the dividend tax were compounded when further subsequent guidance published by HMRC revealed what was referred to as the £5,000 ‘Dividend Allowance’ to be in fact a zero rate band, meaning it still contributes to total taxable dividends, costing most contractors an extra £1,250 a year.
Meanwhile, limited company contractors would also no longer qualify for the £2,000 National Insurance Contributions (NICs) rebate Employment Allowance and a consultation looking into restricting tax relief on travel and subsistence expenses for umbrella company contractors and PSCs was also announced.
Travel and subsistence saga rolls on
The contracting sector remained in the spotlight as the Treasury announced a review into contractor’s travel and subsistence costs, exploring the possibility of forcing contractors to pay for these costs out of their own pockets.
HMRC claimed its Travel and subsistence framework discussion paper was compiled with the intention of exploring ways of modernising and simplifying the rules for tax relief on T&S expenses to make them easier to understand and apply.
However, for Freelancer and Contractor Service Association CEO Julia Kermode, the notion of restricting T&S relief for the contractor workforce places other Government projects at risk.
“George Osborne says he ‘chooses to build’ and is ‘determined to boost the Northern Powerhouse’ but new homes and infrastructure projects are all reliant on the contingent workforce.”
With this broader consultation having only recently closed in mid-December, it remains to be seen what the outcome will be.
Umbrella T&S restrictions dominate quiet Autumn Statement for contractors
The same though cannot be said for the fate of umbrella contractors and PSCs, whose loss of tax relief on travel and subsistence expenses was the standout talking point to emerge from the Autumn Statement 2015.
The Treasury’s ‘blue book’ confirmed the changes, which will come into effect from 6 April 2016. The tax yield from the new legislation is expected to be relatively small, as highlighted by PRISM CEO Crawford Temple.
“The Government is walking blindly up an avenue that will net them relatively small sums - £265m by HMRC’s own reckoning – but cost stretched employers billions and penalise the most flexible workers.”
“Research has shown that large numbers of umbrella company contractors don’t actually claim expenses. Umbrella companies are also hugely efficient collectors of income tax and National Insurance Contributions (NICs), so the net impact will be a fall in take, not an increase,” Chaplin added.
Elsewhere, contractors can expect to benefit both directly and indirectly as a result of infrastructure plans, with the announcement that transport capital spending is set to increase by 50% to £61bn.
Meanwhile, construction contractors should see rising demand for their services in 2016, with the Chancellor pledging £7bn to fund the construction of roughly 400,000 UK homes, in spite of the ongoing skills shortage in the sector.
Contracting sector research reveals value of contingent workforce
The increasing popularity of contracting as a working arrangement was extolled through research carried out in 2015, whilst an announcement of further research into the contracting sector to come over the next year also came courtesy of the Centre for Research on Self-Employment (CRSE).
Kingston University research, commissioned by the Association of Independent Professionals and the Self Employed (IPSE) showed that contractor numbers in the UK have swelled since 2008, increasing by 35.1% to 1.88m.
“This research adds to the mounting evidence of a structural, rather than cyclical, change to the labour market,” noted IPSE’s head of research, education and training Suneeta Johal, who pointed towards a broad-based rise in contractor numbers in terms of age, gender and sector as proof that contracting is seen as an increasingly viable working arrangement.
Finally, IPSE’s annual National Freelancer’s Day celebration brought with it the exciting news that the CRSE – an IPSE-supported thinktank – is set to provide a more detailed insight into the contracting sector through a wealth of new research.
For IPSE director of policy Simon McVicker, the thinktank will provide a strong base for arguments concerning public policy relating to contracting:
“The only way you can make any progress in policymaking today is with evidence-based research. If you can’t back up your argument, it’s worthless. The thinktank also aims to challenge assumptions and myths, and we expect the academics to challenge us as well.”
ContractorCalculator is taking a break until 4 January 2016, when you can read what 2016 has in store for your contracting career with a series of predictions by contracting sector experts. These include IPSE’s Simon McVicker, CMME's Taj Kang and Abbott Moore’s James Abbott.
We wish all our readers an enjoyable Christmas and a healthy, happy and prosperous New Year.