Chancellor Philip Hammond has just announced this year’s Autumn Statement, outlining the government’s future plans for the economy, including imminent changes to tax legislation.
It was Hammond’s first Autumn Statement and it will be his last, as he announced that he is cancelling the Autumn Statement and Spring Budget to make room for an Autumn Budget that will outline government plans well in advance of the new tax year on 6 April.
Highlight quotes from the Chancellor include “build an economy that works for everyone”, “prepare our economy to be resilient as we exit the EU,” and, in a slightly more ominous tone, “tax receipts have been lower than expected this year… added to this a structural effect of rapidly rising incorporation and self-employment, which further erodes revenues.”
In addition to announcing the Office for Budget Responsibility’s (OBR) forecasted growth of the economy and the creation of over 500,000 UK jobs across the forecast period, the Chancellor has published an Autumn Statement that highlights changes that will drastically affect contractors and freelancers in the UK.
Continue reading for our summary of the key Autumn Statement announcements that contractors and freelancers should be aware of:
Changes to IR35 for off-payroll public sector workers
As anticipated, Philip Hammond’s Autumn Statement concludes that from April 2017, contractors working in the public sector will no longer be responsible for determining if they are paying the correct amount of tax to HMRC. The onus will be on the paying body of the contractor’s limited company to deduct the correct amount of tax from the contractor at source. The ‘paying body’ could mean the public sector body, the contractor’s agency or another third party body.
Furthermore, the 5% expense allowance is being removed for those public sector workers who are inside IR35.
The government has made this move to ensure that public sector contractors and freelancers who are doing similar work to employees pay the same amount of tax as employees.
Strengthened sanctions to tackle tax avoidance schemes
As discussed in Budget 2016 and the government’s August 2016 consultation on tax avoidance schemes, the Chancellor has moved to introduce “a new penalty for those that are enabling the use of a tax avoidance scheme that HMRC later challenges and defeats.”
Furthermore, the government will not accept the reliance of ‘non-independent advice’ as an excuse for exercising reasonable care when it comes to using a tax avoidance scheme. HMRC will be receiving increased government investment in order to tackle tax avoidance, which will help it raise £450 million in additional revenue by 2021-22.
Note: A ‘tax avoidance scheme’ can include offshore schemes, loans and other models.
A new rate added to the VAT Flat Rate Scheme (FRS)
In a move to shut down the inappropriate use of the existing VAT Flat Rate Scheme, the Chancellor has introduced a new 16.5% rate, with effect from 1 April 2017, which will be available to businesses with limited costs. An example of a business with limited costs could be a contractor or freelancer with a limited company whose work consists largely of labour.
This will unfortunately lower the VAT tax savings of many contractors depending on which rate they were previously registered on.
The measures which Philip Hammond has laid out to tackle tax avoidance, tax evasion and aggressive tax planning will allegedly raise £2 billion in government revenue over the Budget forecast period.
An increase in Insurance Premium Tax
The standard rate Insurance Premium Tax will increase from 10% to 12% in June 2017, which will be applicable to home insurance, car insurance and travel insurance.
Corporation Tax to fall to 17% as planned
The Chancellor has confirmed that Corporation Tax will be decreasing from 20% to 17% by 2020, as ex-Chancellor George Osborne originally announced in Autumn Statement 2015. This expels rumours that the Chancellor could potentially cut Corporation Tax further to 15% in light of Brexit.
This decrease makes setting up a limited company more beneficial as contractors and freelancers operating outside IR35 legislation will be able to experience a higher take home pay than ever before as a result of paying a lower Corporation Tax.
Class 2 National Insurance to be abolished as planned
As announced at Budget 2016, Class 2 National Insurance contributions for the self-employed will be abolished as planned. Going forward, contractors and freelancers will make their NI contributions through Class 3 and Class 4, with certain allowances for those who fall below the Small Profits Limit of £5,965.
Increasing the thresholds of the personal allowance and higher rate income taxation
As promised, the government will be increasing the tax-free personal allowance to £11,500 in April 2017. Following this, the government will be increasing this allowance further to £12,500 by the end of this Parliament.
The higher rate threshold will also increase to £45,000 in 2017, and again to £50,000 by the end of this Parliament.
Once the personal allowance has reached £12,500, going forward it will rise along with inflation rather than with the National Minimum Wage.
This is good news for contractors and freelancers as they will benefit from increased tax savings as a result of these increases.
Other key Autumn Statement announcements:
Chancellor Philip Hammond also announced some key points that affect the general public and the UK economy as a whole. Read a brief summary of these announcements below:
- The OBR forecasts a slowdown in economic growth to 1.4% in 2017 as a result of low investment, weaker consumer demand, and Sterling depreciation. This will pick back up to 1.7% in 2018 and 2.1% in 2019-20. Overall, the OBR estimates that growth will be 2.4 percentage points lower than if Brexit were not happening.
- The Chancellor and Prime Minister Theresa May are no longer seeking to deliver a budget surplus by 2019-20.
- Fuel duty rise has been cancelled for the 7th year in a row, saving the average car driver £130 per year, and the average van driver £350 per year.
- The Chancellor is prioritising investment in infrastructure and innovation, funded by additional borrowing. Hammond announced a National Productivity Investment Fund of £23 billion to spend on innovation and infrastructure over the next 5 years, with a specific focus on Research and Development. Hammond also announced a £1 billion investment in digital infrastructure, including 5G mobile.
- The government will use a £2.3 billion Housing Infrastructure Fund to deliver infrastructure to 100,000 new homes in areas of high demand. £1.4 billion will also be invested to create 40,000 affordable homes in England. In addition to other road, rail and transport investments, £1.1 billion will be used to improve England’s local transport networks.
This Autumn Statement has certainly proved interesting and has not failed to deliver big news to the world of contracting and freelancing, both for the good and for the bad.
What do you think of this year’s Autumn Statement announcement? Has your outlook on the future of the contracting industry changed? If so, has it changed for better or for worse? Give us your thoughts by commenting below.