Contractors remain subject to IR35, while income tax and NI may merge – Budget 2011

Contractors will remain subject to IR35 and its administration will be improved, while a consultation will be launched to consider the merger of income tax and National Insurance Contributions (NICs). Those were among the Budget 2011 highlights relevant to contractors, as revealed by Chancellor George Osborne.

And in a message to be welcomed by contractors who have suffered for more than a decade from the complexities of IR35, the Chancellor said it is “...time we took this historic step to simplify our tax system and make it fit for the modern age.”

He continued: “This is not a tax-raising budget, but nor can we afford a giveaway.” However, corporation tax is to fall by 2% from April, not the 1% previously announced, and the planned fuel duty increase of 1p has not only been frozen, but a further 1p a litre in duty has also been cut. Other good news for contractors includes further rises in personal allowances, which are due to come into effect in 2012.

Highlights of the 2011 Budget

IR35:

• Following the Office of Tax Simplification’s interim report on Small Business Taxation and recommended options for replacing IR35, the Chancellor has opted to retain IR35 and introduce improvements in its enforcement and administration

Corporation tax

• The ‘small profits’ rate of corporation tax paid by contractor limited companies falls by 1% to 20% from April 2011
• Main rate of corporation tax to drop by 2%
• 43 tax reliefs will be abolished, removing 100 pages from the tax code

Income taxes:

• The basic allowance increases by £1,000 to £7,475 from April 2011, but higher and additional rate taxpayers won’t benefit. A further £630 increase in the personal allowance is due in April 2012, when it will rise to £8,015
• The higher rate threshold falls to £35,000 from £37,400,
• Dividend taxes remain unchanged
• The 50% income tax rate will remain, but will be reviewed and is confirmed as a temporary measure
• National Insurance Contributions (NICs) are set to increase for employers to 13.8%, from 12.8%, but the threshold is being reduced
• Higher rate contractors will receive reduced childcare tax allowances
• ‘Employment Income through third parties’ legislation will tax income through schemes such as Employee Benefit Trusts (EBTs) as employment income, adding income tax and National Insurance Contributions, effective from 9 December 2010

Pensions, savings and investments

• Tax-free pension contribution allowances fall to £50,000 a year, and the lifetime allowance falls to £1.5m from the 2012-2013 financial year onwards; the changes are complex and contractors should consult their Independent Financial Adviser (IFA)
• Contractors with property portfolios that include let furnished holiday properties lose a range of allowances, which will leave them out of pocket
• Individual Savings Accounts (ISAs) allowances increase by £480 to £10,680 a year, which includes a component in cash of £5,340

Travel and lifestyle:

• A ‘fuel stabiliser’ is to be introduced, cutting fuel duty of 1p per litre; a planned 1p rise due in April 2011 has been frozen, while a further rise planned for April 2012 will be delayed until the following summer. The escalator will not apply when oil prices are high
• Vehicle Excise Duty (VED) to increase in line with inflation
• Mileage rates to increase from 40p to 45p per mile for the first 10,000 miles, and to 25p thereafter
• Help for first-time home buyers to get on the property ladder
• Aircraft passenger tax to stay, but frozen for another year
• Alcohol duty to rise on high strength beers and tobacco duty to increase

Avoidance and evasion measures

• Tackling tax avoidance strategy published, mainly focused on big business
• Includes new disguised remuneration through EBTs, which may affect some contractors
• Tax avoidance measures may raise up to £1bn in the coming year

Other measures that may impact on some contractors:

• The bank levy will be imposed on a range of financial services organisations operating in the UK; being a UK-only tax, the result could mean some financial institutions relocate all or part of their businesses to different tax jurisdictions, which would result in fewer contracts
• Technical changes to oil field taxation may stimulate redevelopment of oil fields previously deemed uneconomical and increase new oilfield development, which is likely to result in increased contract opportunities
• Changes to how leases are defined coming into force during 2013 may affect contractors who lease vehicles and equipment through their business; this is a complex area and contractors should consult their accountant
• Contractors who provide free samples of products for marketing purposes will enjoy extended VAT relief on samples subsequent to the first one
• New anti-avoidance rules may require the directors of employment businesses and umbrella solutions providers with poor HMRC compliance records to provide security against income tax liabilities under Pay As You Earn (PAYE); these will be similar to rules already in place for VAT.

Also buried in the small print of the draft Finance Bill 2011 is the introduction of a raft of data-gathering powers granted to HMRC. These powers will enable the taxman to force third parties to provide information about a contractor’s tax and financial affairs. Third parties such as clients or business associates could be fined if they fail to comply with a request from HMRC.

Further analysis of the implications of this year’s Budget for contractors and expert commentary will be published by ContractorCalculator soon.