Published on Tuesday, March 24, 2015 in category: News @ Broome
Now that the dust has settled on last week's budget, we thought we'd look beyond the electioneering to find out what it really means for the ordinary contractor...
As is often the case just before a general election, last weel's Budget was heavy on rhetoric but thin on content. The Chancellor announced that the personal allowance will be raised to £10,600. Sounds great, but in reality even higher rate taxpayers will only be £4.61 better off per week.
Plans were also announce to raise (there's that word again - is there a election coming up?) the 40p rate to £43,300 in 2017-18. Again, sounds good, but, again, in reality, it doesn't make a great deal of difference to the typical contractor. This measure will mean £1,435 per year extra will be taken out of 40p rate and into the 20p rate. Expect to have an extra £5.50 in your pocket.
Travel and subsistence claims
In the Autumn statement last year it was announced that the Govermnent would review the tax relief on trave and subsistence (T&S) expenses for temporary workers. In the Budget, it was confirmed that the Government intend to implement the findings of this review effective from 6th April 2016. This is likely to restrict the tax relief available for workers engaged through an umbrella company or their own limited company (ie, you) who are also under the supervision, directions and control of the end user. This legislation was intended to level the playing field in the lower end of the market so that unscruoulous employment agencies could not pad out expenses claims to restrict their, and their workers', tax bills. Of course, the law of unintended consequences means that genuine limited company contractors will doubtless get caught in the net. Although to be fair, the Chancellor did say that the government would continue to protect the self-employed so it remains to be seen what effect, if any, this new T&S rule will have on the many thousands of genuine contractors.
The wording in the documents we have seen so far is very similar to that when IR35 was introduced and in our view is poorly thought out tinkering at the edges. We suspect that after the consutation period it will boil down to: Inside IR35 - no expenses; Outside IR35 - as you were.
Many contractors who are retiring or returning to permiedom take advantage of Entrepreneur's Relief in their tax planning processes and it is something we have been using effectively for some years. Essentially, a contractor defers income to avoid, in whole or in part, the 40% tax rate and allows funds to build up in the company. Then when the time is right, he disposes of his shares in the company and extracts the funds as capital - not income. In this manner, the first £11,000 can be extracted with no tax and the balance taxed at just 10%. Clearly there are significant savings to be made here if planned properly.
The Chancellor announced that changes would be made to who can claim Entrepreneur's Relief but from what we have seen so far, the vast majority of contractors will be unaffected.
Planned phasing out of paper tax returns
Even the most fervent supporter of HMRC will be able to predict the shambles that this little gem will precipitate. As a veteran of many of HMRC's so-called simplifications (RTI anyone), I hold out no great hope for the success of this one. While I broadly agree that the concept is a good one, I fear that the various computer systems which are going to need to speak to each other simply won't be up to the job. Still, it'll be good news for the mega-consultancy that wins the contract to implement it.
Alan Broome is founding director of Broome Affinity Ltd and advises contractors on accounting and taxation.