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Budget 2012: Highlights for Contractors

Chancellor George Osborne today announced his Budget for wide reaching reforms to the tax system to reward work and support growth. The reforms are intended to lower headline rates, diversify and broaden bases and limit reliefs, based on the principle that the tax system should be fair, efficient and simple. Here are the key points that may affect contractors


IR35

The Government will introduce a package of measures to tackle avoidance through the use of personal service companies (PSC) and to make the IR35 legislation easier to understand for those who are genuinely in business. This will include two measures that were already known about but still awaiting further details:

  • strengthening up specialist compliance teams to tackle avoidance of employment income; and 
  • simplifying the way IR35 is administered

The third announcement addresses the role of an office holder being undertaken by a PSC, something that has caused recent media excitement, e.g. Ed Lester. Currently, IR35 does not apply to these situations although NIC still remains payable by the PSC. Subject to consultation, office holders/controlling persons who are integral to the running of an organisation will be required to have PAYE and NICs deducted at source by the organisation by which they are engaged. This will be introduced in next year’s Finance Bill.

General Anti-Abuse Rule (GAAR)

Following recommendations in the Aaronson report, a consultation document will be issued in the summer with a view to bringing forward legislation in Finance Bill 2013. The Government is committed to ensuring that this legislation effectively tackles artificial and abusive tax avoidance schemes and that the supporting guidance is both practical for taxpayers and HMRC.

Headline Tax Rates

The additional rate of income tax of 50% will be reduced to 45% from April 2013 following HMRC's report that since its introduction the 50p rate of tax has caused massive distortions in self-assessment receipts.

The main rate of corporation tax will be reduced to 24% in April 2012, 23% in April 2013 and 22% in April 2014.

Personal Tax

In pursuit of its commitment to raise the personal allowance to £10,000,  the Government will increase the personal allowance to £9,205 from 6th April 2013.

From April 2013 there will be a new cap on income tax reliefs to ensure that those on higher incomes cannot use income tax reliefs excessively. For anyone seeking to claim more than £50,000 of relief, a cap will be set at 25% of income (or £50,000, whichever is the greater).

In line with the reduction in the additional rate of income tax, from April 2013, the dividend additional rate will be reduced from 42.5% to 37.5%.

A detailed consultation on the integration of income tax and NIC will be published after the Budget setting out a broad range of options for the operation for employee, employer and self-employed NICs.

Capital Gains Tax

The annual exempt amount will remain at £10,600 for 2012/13. From April 2013 it will rise in line with the CPI instead of the RPI.

Tax Administration

From the 2014/15 tax year around 20 million taxpayers will receive a Personal Tax Statement which will detail the income tax and NICs they have paid, their average tax rates and how this contributes to public spending.

By Andy Vessey

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