The 2016 Autumn Statement followed the recent theme of attacking Contractors. Here is what you need to know.
Bear in mind though that most of these measure are still open to consultation and are not yet law so everything could still change before they are due to come in on 1 April 2017. We hope they do change as they seem badly thought out even by the standards of existing IR35 legislation.
New Measures Announced in the Autumn Statement
IR35 for Public Sector Contractors
The Autumn Statement provided a bit more clarity on the changes coming to the IR35 regime specifically to public sector Contractors. It’s worth pointing out that none of this applies to those of you whose end client is a private sector business (for now at least).
The main change is that the burden of identifying whether a Contract is inside or outside of IR35 will now fall on the ‘paying agent’. In most cases this will mean a recruitment agent sitting between the Contractor and the end client, in some cases it may mean the public sector body themselves.
When a paying agent deems a contract to be inside IR35 they must deduct income tax and national insurance before paying the Contractor. The government has said there will be reliefs to avoid double taxation (ie so the Contractor doesn’t have to pay Corporation Tax on top of the income tax deducted) but it’s not at all clear yet how the tax accounting will work on this.
In theory this doesn’t change which contracts are inside or outside IR35 it just changes who decides but it’s probably fair to assume that an agency will seek to protect themselves by erring towards inside IR35.
In summary, the effect of this is likely to be that more public sector contracts are deemed inside IR35 and an additional tax burden is put on the Contractor as they are forced to take their earnings as salary instead of the more tax efficient dividend method.
16.5% VAT Flat Rate Scheme Rate for ‘Limited Cost Traders’
At the moment there are some great tax advantages for Contractors (see our calculator here) that use the VAT Flat Rate Scheme. HMRC clearly don’t like this so have introduced a rule that forces all companies (not just Contractors) that have few costs onto a higher rate of 16.5%, which is likely to eliminate all the advantages of the scheme.
They’ve released a definition of how a Limited Cost Trader is defined:
A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:
– less than 2% of their VAT inclusive turnover in a prescribed accounting period
– greater than 2% of their VAT inclusive turnover but less than £1000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000)
Note that it is goods that need to be considered here. For some reason services don’t count in the calculation. You also need to exclude capital expenditure (ie fixed assets like computers), lunch claims, vehicle parts and fuel from the calculation. It could mean a big boost to stationers’!
In our opinion this is a terrible change and would hope that it is amended so that at least services (like software and accounting fees) are taken into account.
This will probably mean that in the future most Contractors and also small services businesses should come off the VAT Flat Rate Scheme and move onto the standard VAT scheme. Once the rules are clearer we’ll be reaching out to all our clients to advise on the best course of action.
This supposed tax simplification measure has just got very complicated.