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With one sentence, Chancellor George Osborne brought back the memories of more than a decade ago when contractors, operating through their own limited companies, were singled out for a clampdown on perceived abuse and misuse through so-called 'disguised employment' status.
From the Dispatch Box, Mr Osborne said:"We’re consulting today on how to deal with the increasing abuse of the rules around disguised employment when working through a personal service company."
Several issues could impact on them - and not necessarily favourably.
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"Obviously we’ll have to wait to see what the Government intends to do with IR35. Despite their reference to ‘fairness’, I doubt the outcome will please most contractors. HMRC have been focusing on supervision, direction and control recently so perhaps that will take the front seat in any new proposals.
"The big talking point is the changes to dividend tax, which are going to hit contractors hard. Ultimately it will probably still be more efficient to take dividends rather than extracting income as salary, but the gap is certainly closing. The reduction in Corporation Tax will soften the blow slightly, but that’s not happening until 2017.
"As always the devil will be in the detail, but it looks like it will be a bit of a kick in the teeth for contractors."
IR35 - revisited
IR35 is clearly back on the agenda. Ironically it wasn't so long ago that some pressure groups were pinning their hopes on a Conservative Government to abolish it.
Now, its future is unclear, but, rather than talk of abolition, the Government wants to improve its effectiveness, as it claims non-compliance is costing more than £400 million a year.
There will now be consultation with the business community and a discussion document will be published shortly.
In the Red Book which contains the post-Budget details (1.180 and 1.181):
"The Government recognises that many individuals choose to work through their own limited company. However, where people would have been employees if they were providing their services directly, anti-avoidance legislation commonly known as IR35 introduced in 2000 requires that they pay broadly the same tax and National Insurance as other employees. As highlighted by reports from the Office of Tax Simplification and the House of Lords, it is clear that IR35 is not effective enough. Non-compliance in this area is estimated to cost over £400 million a year.
"The Government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. The Government wants to find a solution that protects the Exchequer and improves fairness in the system."
..and later in the Red Book (2.183)...
IR35 reform "The Government will engage with stakeholders this year on how to improve the effectiveness of existing intermediaries legislation (‘IR35’) which is designed to protect against disguised employment. A discussion document will be published after Summer Budget 2015."
Brookson: Dialogue
Specialist contractor accountants, Brookson, said: "With self-employment tsar David Morris announcing recently that he would “like to tackle IR35” in the coming months, pre Budget speculation had been growing that the Summer Budget will bring some news on this.
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"Brookson have been contacted today (July 8) by HMRC on this matter who have stated that "Despite all of our joint work over the last couple of years on improving the administration of IR35 we believe non-compliance with the legislation is still widespread and more fundamental reform is needed to improve the effectiveness of the rules. So HMRC will engage with stakeholders over the coming months on the best way to reform the legislation.”
"HMRC intend to publish a discussion document shortly setting out a framework for those discussions which Brookson will of course be involved in."
IPSE - Legitimate
CEO of self employment group, IPSE, Chris Bryce said: "The Chancellor is absolutely right to target aggressive tax avoidance and evasion. However, focusing on personal services companies risks many self-employed people being unfairly hit if they are confused with people abusing the system.
“The Government’s consultation provides an opportunity to separate the abusers from legitimate small businesses and we will engage robustly with Government to ensure freelancers and contractors are not unfairly targeted.”
For further information
Full coverage of issues affecting small businesses and freelancers - and experts reactions to them - will be available in the Political News section of Shout99.
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Susie Hughes © Shout99 2015
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