Chancellor Philip Hammond unveiled Budget 2018 on Monday 29 October 2018 – his last before Brexit. Overall, the reception to the Budget has been greeted with mixed emotions, but it is fair to say that some of the announcements are more positive than many predicted. However, contractors will be impacted for better and for worse – we have summarised the key points below.
IR35 changes in the private sector have been confirmed
As feared, some private sector contractors with a limited company (Personal Service Company) will no longer be able to determine their own IR35 status from April 2020.
The burden for applying IR35 (or not) to PSCs in the private sector will fall on ‘the organisation, agency or other third party engaging the worker’. For the purposes of IR35 this usually means the engager is the end-client, even if they engage the worker through a recruitment agency.
Only PSCs who are engaged by small organisations will be exempt from this rule. The change to IR35 applies to medium and large-sized clients that engage PSCs.
Responses to the consultation on Off-payroll working in the private sector showed an overwhelming concern that some small businesses would struggle to adjust to new processes.
What counts as a ‘small business’?
The government will apparently apply the Companies Act 2006 definition of a small business to the aforementioned exemption. According to the Act these include companies who meet two or more of the following requirements:
- An annual turnover no higher than £10.2 million
- An annual balance sheet total no higher than £5.1 million
- No more than 50 employees
Recognising the need for more time to adjust than the public sector was afforded, the government has set the date for changes in the private sector for April 2020. This, the government claims, should give affected businesses ample time to adjust.
How will private sector contractors be affected?
Contractors operating through their own limited company (a PSC) who are engaged by a medium or large-sized client will not be able to determine their own IR35 status from April 2020. Instead the client will be responsible for stipulating whether the working arrangements put the PSC ‘inside IR35’ or ‘outside IR35’.
If an arrangement is ‘inside IR35’ it will be the responsibility of the engager – usually the fee-payer – to deduct the required income tax and employee National Insurance Contributions (NICs) before paying the PSC.
The changes to IR35 in the private sector will not affect the true self-employed or PSCs engaged by small businesses. However, it’s important to be knowledgeable of all forthcoming changes should you ever be engaged by a large client in the future.
The reality – most private sector contractors will face the changes
The government’s consultation document mentions that since 95% of private sector businesses are small, only 5% will have to apply the reform. However the reality is: many private companies that engage contractors are giant firms – especially in the IT/technology, finance/banking and construction industries. Therefore thousands of contractors will in fact not be able to decide their own IR35 status from April 2020.
What other Budget announcements affect contractors?
Entrepreneurs’ Relief has been tightened
Philip Hammond did not confirm suspicions that Entrepreneurs’ Relief would be abolished. Instead he extended the qualifying period from 12 months to 24 months.
This means in order to benefit from Entrepreneurs’ Relief, one has to meet the qualifying conditions throughout a two year period instead of a one year period. The change applies from 6 April 2019.
What is Entrepreneurs’ Relief?
Entrepreneurs’ Relief reduces the amount of Capital Gains Tax paid on the disposal of a business or shares in a company. Open to directors who own 5% or more of a company, those who qualify are able to pay a reduced tax of 10% on capital gains up to a lifetime limit of £10 million. This compares to 28% tax without the relief.
This could apply to some contractors who own their own limited company and wish to undergo a Members Voluntary Liquidation (MVL) when they no longer require their company (as long as it is in good standing).
Good news – the Personal Allowance and Higher Rate thresholds are increasing
Rather than halt plans to raise the Personal Allowance in order to fund the NHS, Philip Hammond instead pushed forward increases to the Personal Allowance and the Higher Rate thresholds. This is one year earlier than the Conservatives original plan of 2020/21.
From 2019/20, the Personal Allowance will increase to £12,500 – giving basic rate taxpayers a £130 per year income boost.
The Higher Rate threshold will rise from £46,350 to £50,000 – benefitting higher rate taxpayers to the tune of £860 per year.
VAT thresholds remain unchanged
The registration and deregistration thresholds for VAT will remain at the current level – this will be frozen for two years, giving the government time to look at options for smoothing the entire process.
The current thresholds are as follows:
- Registration: VAT taxable turnover of £85,000 per annum
- Deregistration: VAT taxable turnover of £83,000 per annum
Businesses with a VAT taxable turnover under the registration threshold may still elect to register for VAT voluntarily.
The government has been urged to analyse the design of the VAT threshold as some believe competition between businesses who pay and don’t pay VAT is ‘distorted’.
Download our Budget 2018 Report
You can download our full Budget 2018 Report for a look at all the key announcements made at the Budget.
There will be a consultation on the details for Off-payroll in the private sector, which we hope will fill the gaps for contractors regarding the April 2020 changes. Once this has been completed, the information is expected to help draft next summer’s Finance Bill.
Churchill Knight will ensure you are kept up to date on developments in rules and regulations affecting contractors, freelancers and recruitment professionals. Our number one priority is ensuring contractors are able to enjoy the benefits of full self-employment where possible, and to provide accountancy and payroll solutions for all contract types.
Contact us for more information on your payroll options.