I was eager to hear Philip Hammond’s first Autumn Statement to Parliament, in particular his response to the proposed IR35 legislation. You may recall my blog back in July, IR35 Reform up for Discussion. At the time I reviewed the consultation concerning the IR35 changes and said:
“My only concern, as we have seen in the past, is that despite extensive lobbying and “there is no way they can pass this” comments, the Government has a way of passing significant legislation that has a substantial impact on a lot of business owners.”
The Autumn Statement confirmed that I was right to be concerned. From April 2017, off-payroll working rules in the public sector will be reformed. This means that agencies will now be responsible for ensuring that one man band companies, namely Personal Service Companies (PSCs), are paying the correct tax and NICs. The legislation is aimed at tackling non-compliance with the current rules and aims to ensure that anyone working through a PSC in the public sector will pay the same tax as employees.
In summary, agencies will be responsible for assessing whether IR35 should apply to each PSC. If an agency were to decide that the IR35 rules did not apply, HMRC could challenge their assessment and then assess any tax and NI on the agency. In reality I think this means that it is highly likely that agencies operating within the public sector can no longer allow their contractors to work via their own limited companies.
What’s more, those caught within the IR35 legislation and working within the public sector will no longer be entitled to the 5% tax free allowance. The allowance was given to take into account the administration burden for ‘on-going running costs’. However, as contractors will no longer be responsible for calculating their pay, the government has decided to scrap the allowance altogether.
Consequently, the impact of these changes will most likely mean the end of PSCs in the public sector. There will be no financial benefit whatsoever for a contractor to operate under a PSC and they may even be worse off for doing so. It also means that agencies are going to have a lot more responsibility and work.
I suspect that this change is just the beginning and it will only be a matter of time before the new rules apply to all PSCs, not just those in the public sector.
Some other changes that came from the Autumn Statement, which you should be aware of are:
- Disguised remuneration avoidance targeting. The government is extending the changes announced at the Budget 2016 to tackle the use of these schemes by the self-employed.
- Flat Rate VAT Scheme (FRS). From April 2017, a new 16.5% rate on the FRS will be introduced for businesses with limited costs. This is targeted at businesses who spend less than 2% of their VAT inclusive turnover on VAT inclusive goods. Consequently, the tax advantage of operating the VAT Flat Rate Scheme is likely to disappear for most contractor companies.
- From April 2017, the National Living Wage will increase by 4.2%, from £7.20 to £7.50.
- Employers and Employees National Insurance are due to be equalized at £157 per week.
- Tax savings on salary sacrifice and benefits in kind to be stopped. For more information read our article, Salary Sacrifice Benefits Soon to be Limited.
If you have any questions concerning these updates (in particular the IR35 changes) and how you should begin to plan and prepare for them, contact me at email@example.com. I have already advised a number of clients and will be working closely with the recruitment sector in the coming months to help it to get to grips with the new legislation.