The Summer Budget & IR35 discussion document

Qdos’ view on the recent announcements

The Summer Budget
The Conservative Party released their first Conservative only Budget in 19 years recently. The Budget set out 4 statements that were sure to hit PSC’s (personal service companies) hard and caused a lot of discussion in contracting circles.

Firstly, the changes in dividend tax. Directors can no longer receive a 10% tax credit but will now just have a £5,000 tax-free dividend. After that all dividends will be taxed at 7.5% for basic rate payers, 32.5% for higher rate payers, and 38.1% for additional rate payers. This has seen a lot of attention in contractor forums with some claiming that incorporation is becoming an unattractive prospect and others saying it’s fair and bringing self-employment more closely in line with employment roles.

Secondly, the announcement that all umbrella companies and PSC’s that are working under the supervision, direction and control of the end client will no longer be allowed to claim travel and subsistence expenses. As this is one of the most attractive aspects of operating through an umbrella, this could see more contractors opting to work via a PSC. For many contractors travel is among their biggest claimable expenditure, this will surely hit many hard.

Thirdly, while employer NIC allowance was raised from £2,000 to £3,000, it was announced that PSC’s with one sole director and employee would no longer be able to claim this.

Finally it was announced that IR35 was not effective enough and therefore would be scrutinised.

IR35 Discussion Document
At the end of last week, the intermediaries legislation (IR35) discussion document was released with some interesting topics.

The first thing I noticed was the stress that IR35 was currently not effective enough, although it was essential. In short, it isn’t going anywhere anytime soon. Although HMRC’s revenue from IR35 investigations isn’t high, they claim it saves millions as a deterrent. However, this is now being addressed to be more effective with the following suggestions.
It was stated that there could be more responsibility for the engager to ensure that when engaging PSC’s they are working compliantly. We have already seen this introduced in the public sector and so it is a natural progression for it to be applied to all.

In terms of the way that IR35 status is to be assessed, there were two points outlined. More of an emphasis is likely to be put on supervision, direction and control and length of contract will become more important. It is suggested that short contracts cannot be considered employment. While control has always been one of the three key tests in determining IR35 status as set out in the ready mixed concrete employment tribunal from 1968, the focus has been more on a lack of personal service and the right of substitution.

What does this mean for contractors?
Well, due to the Summer Budget announcements, most contractors will be paying more tax than previous years but does this make incorporation less attractive? To some perhaps, but on the whole no! Most contractors don’t work through a limited company purely for tax savings. Working through a limited company offers many other benefits such as commanding a higher day rate, freedom to work for different end clients with no obligation to stay, flexible hours, the list goes on. More than likely we will see a trend of contractors rates being raised to accommodate any difference in tax paid.

Taking away the travel and subsistence expenses from contractors will be a hit for many and policing this will more than likely be attached to an IR35 enquiry, so ensuring you have taken the necessary steps to protect yourself is going to be more prudent than ever. So although we will have to wait until September to know the final details, contractors should be actively checking their contracts and working practices are compliant via a professional review, as well as obtaining the relevant insurances to cover such liability.

This article was written by Jon Page Qdos Contractor

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