The Autumn Budget and Owner Managed Businesses - what will happen to IR35?
The Chancellor will reveal his Autumn Budget on 22 November 2017, ushering in a return to a single annual budget...
The Chancellor will reveal his Autumn Budget on 22 November 2017, ushering in a return to a single annual budget that will - save for any urgent changes, such as anti-avoidance measures, that will have immediate effect - announce changes to take effect the following April giving businesses more time to plan for and accommodate any changes.
Whilst some of the changes that are intended to come into effect next April, such as the changes to the taxation of termination payments, have been previously announced in terms of new measures it is always difficult to predict exactly what changes will be made.
There are, however, often 'leaks' to the media in relation to certain proposals that are under consideration, particularly those that are likely to be more controversial, which are used to test the waters. Further clues can also be gained by way of looking at the tax related consultations that have been announced by the government.
If certain media reports are to be believed the Chancellor is prepared to put forward some radical changes, rather than adopt a more cautious, 'steady as she goes' approach in light of what may become choppy Brexit waters. The recent election result will also loom large and, as a result, it is widely expected that there will be some major announcements and policy changes in certain areas such as housing and the mention of other policies aimed at wooing younger voters.
What impact will the budget have on business?
What’s the likely impact of the budget for business and in particular for Owner Managed Businesses - what can we expect?
This update is the first of a short series of four articles leading up to the budget that set out our predictions of some of the potential changes that may be announced in the budget which could have a significant impact upon OMBs.
The forthcoming articles will look at potential changes to Entrepreneurs’ Relief, venture capital reliefs for investors and pensions but we begin with what is potentially the most important change which, although it will affect some businesses more than others, is likely to have an impact in one way or another on all OMBs. This is the potential changes to IR35.
IR35 – contractors and consultants
IR35 is a colloquial reference to the legislation that essentially requires individuals who would have been regarded as employees of the service user/client but for the imposition of an intermediary (such as a Personal Service Company (PSC) or agency), to broadly pay the same taxes as if they had been employed directly.
The burden for deducting and accounting for PAYE and NICs generally falls upon the intermediary through which the services of the individual are provided rather then the client (i.e. the person contracting with the intermediary).
The bottom line is that a self employed person generates less taxes than an equivalent employee – primarily due to the fact that a self employed person does not pay any employers NICs. They are are also more generous tax reliefs and deductions for the self employed, though these are being steadily whittled down and tightened up.
The government are concerned that there have been a rise in the number of workers who provide their services through intermediaries, such as a PSC, in order to claim that they are self employed.
Determining whether or not someone is an employee or self employed for tax purposes is not straightforward and highly fact dependent and status enquiries can be time consuming. The tax rules in relation to 'self employed' consultants and contractors working within the public sector who provide their services via an intermediary were therefore changed earlier this year so that the risk and responsibility for assessing the employment status of the worker under the IR35 rules now falls upon the client - the public sector body.
Changing the rules of the game so that the public sector engager may be held liable for any underpaid tax if they pay any contractors gross (off payroll) who are subsequently determined to fall within IR35 (and hence should be on payroll) has, as one might expect, led to a much more cautious approach. The government believes these changes have already proven a success – statistics indicating that an additional 90,000 contractors have been added to the payroll of public bodies in the 3 months from April to June this year.
There has, however, also been some evidence that these changes have exacerbated certain skills shortage in the public sector as contractors have opted out of working for public sector bodies because of these changes. There have therefore been indications from the Treasury that the changes will be rolled out to the private sector sooner rather than later in order to create a more “level playing field” and it is anticipated that such changes may be announced in the forthcoming budget.
If your business relies upon the use of freelancers or self employed contractors or consultants, particularly those who operate via their own personal service companies or who are supplied to you through agencies, you could find that you will have to assess their employment status and put them on payroll. The impact of this will vary but the bottom line is that it could increase the underlying costs of the business. It will also invariably require changes in the processes and procedures that need to be put in place when engaging contractors who supply their services via intermediaries, and updating as required the standard contractual terms and conditions when doing so (such as expressly providing for payroll tax deduction to be made from payments).
Whilst HMRC have produced an online Employment Status Test for this purpose, the tool is a somewhat crude and unsophisticated test that is certainly not appropriate in all cases and therefore, it may be that a more bespoke testing process, such as that provided by our employment team should be considered.
Haydn Rogan is a tax specialist and a partner and can be contacted on +44 (0)161 214 0517 or email firstname.lastname@example.org.