Budget 2017: what contractors can expect

Philip Hamond’s reported remark ahead of Budget 2017 next Wednesday that “there is no pot of money under my desk” won’t surprise contractors, as they know chancellors are more likely to keep there a scythe to pare back PSCs’ and umbrella users’ incomes, writes Duncan Strike, senior director at Intouch Accounting.

But after the four-fold attack by Mr Hammond’s predecessor at the Summer Budget, and after his own heap of anti-contractor measures at Autumn Statement 2016, what can contractors genuinely expect on March 8th at this chancellor’s first (and last) Spring Budget?

IR35 in the public sector

Now that this coming April's overhaul of IR35 in the public sector has reached the mainstream media, contractors and commentators who want a reprieve from it appear to have a greater chance of success. Their hopes will have been raised further in recent days with three government bodies (SOLACE, the LGA and CIPFA), all calling for the reform to be delayed.

A surer bet than a delay appears to be some tweaking to the legislation, such as the potential for concerns about liability to be addressed. Talk of a ‘duty of care’ has gained momentum too. In addition, anecdotal reports of issues with the IR35 digital tool / the ESS, suggest that the legislation may not be the only thing that’s in need of refining, if these reforms are to succeed from April 6th.

And it’s not just about success initially; it’s about credibility in the longer term too. An IR35 tool that tells droves of clearly ‘inside’ PSCs that the off-payroll rules don’t apply, and droves of clearly ‘outside’ PSCs that the rules do apply, is destined to go the way of the Business Entity Tests.

What seems much more certain to happen on Wednesday is that our wish (expressed before Autumn Statement 2016) that these IR35 reforms will be totally abandoned is not going to be granted, even if they are shelved for 12 months.  

VAT

While contractors’ sights are understandably focussed on the changes to the Flat Rate VAT Scheme from April, the more likely VAT announcement from Mr Hammond is for him to back the interim simplification findings of the OTS. The OTS’s fuller recommendations won’t be made until autumn, however.

As to the April changes to the FRS, there has been very little objection to the more costly ‘limited cost’ trader definition that IT contractors will generally be caught by, especially when compared to the opposition voiced to the IR35 reforms (there is a petition against the IR35 reforms, showing almost 30,000 signatures). This absence of challenge, other than the persuasive arguments made by the CIOT, indicate that VAT bills will indeed go up to 16.5% for most IT contractors from April. Unfortunately for those seeking a quick fix, de-registering from the FRS and applying standard VAT is not the answer if take-home pay’s your priority.

But it would be the answer if the chancellor does what he’s been asked to by the tourism industry -- halve Britain’s VAT rate so its cities can compete with the likes of Barcelona, where VAT is 10%. For quite a while though, chancellors have been reluctant to cut the VAT rate, although a supposedly cautious Mr Hammond might be more willing to shave VAT for a temporary time only, so he does not have a ‘full’ tax cut on his books.

Misc

Dividend taxation, expenses for umbrella company workers, the NI Employment Allowance for one-person limited companies, the 5% expenses rule for IR35 in the public sector -- all are previous victims of raids by recent chancellors. We therefore expect all these areas to remain as they are; untouched at Budget 2017.

But could they provide Mr Hammond a foundation to build on? For example, might he look at whether the private sector should lose the 5% expenses allowance on IR35, for example, as part of the start of rolling out the public sector’s ‘off-payroll’ rules to PSCs with commercial clients? For contracting as a whole, this would be dreadful yet not impossible.

The usual suspects

A Budget wouldn’t be a Budget without a chancellor acting on the following and we expect Budget 2017 to be no different, so Wednesday’s will almost certainly contain:

► Action against tax avoidance and tax avoiders.

Disguised Remuneration users should be on their guard on Wednesday, not just because their card was marked previously for April 2019, but also in light of a new guidance update from HMRC, showing it remains a live issue.

► Making Tax Digital

More than any other tax plan, even including the IR35 reforms, the consensus on ‘MTD’ is that a delay is necessary. At least a ‘listening exercise’ should be actioned before HMRC takes further actions.

► An increase to the Personal ‘tax-free’ Allowance

We expect the chancellor to confirm that the Treasury intends to set the PA at £12,500 during this parliament. This is one of the Budget 2017 wishes of the Institute of Directors. Its others are quite contractor-friendly too, notably the issuing of a ‘white-list’ by HMRC of permissible and authentic tax-planning for firms to employ. Contractors would love that; the Revenue wouldn’t.