Limited company contractors braced for Autumn Budget 2020 to overhaul tax and dividends

Advisers to limited company contractors are increasingly anxious at a rumoured blueprint for Autumn Statement 2020 which hikes corporation tax, capital gains tax and dividends tax.

Mooted at the weekend, the blueprint forms only part of the advisers’ anxiety however, as new ‘alternative’ ways to taxing PSCs may also be unveiled by the chancellor in November.

Rebecca Seeley Harris, a status adviser who has previously helped Rishi Sunak’s Treasury draw up tax proposals, says any new way to tax PSCs would be on top of IR35 reform.

'On top of off-payroll reform'

“NIC rate rises are being considered for the self-employed in the [Autumn] Budget, along with alternative taxation for PSCs,” said Seeley Harris, the founder of ReLegal Consulting.

“These considerations are being made in addition to, and not instead of, the reforms to the off payroll framework from April 2021, which are already going ahead from then.”

The former Treasury secondee was referring to a new ‘stock take’ by the Office of Tax Simplification, in which America’s version of PSCs is outlined under ‘possible future work.’

'Fruitful to explore alternative to PSCs'

Specifically, the OTS says the ‘S-Corporation’ model, whereby a small personal service-style business operates as a limited entity but is not taxed itself, would be “fruitful” to explore.

On top of requirements that the entity and its shareholders would need to satisfy, the OTS adds that the entity’s income or capital profits ‘would be taxed on the directors as if received as income or profits from self-employment.’

But the boss of ReLegal Consulting, who points out the OTS other ‘alternatives’ for PSC taxation include the ‘SEPA’ and ‘look-through’ models, isn’t convinced by S-Corp.

'Counter-productive'

“The OTS are presuming that the off-payroll rules would still apply,” she said.

“Therefore, any alternatives [including the S-Corp] would still have to consider that legislation, which seems counter-productive.”

The ex-OTS adviser isn’t alone in foreseeing independent workers facing adverse changes in National Insurance, among other levies, in Mr Sunak’s Autumn Statement.

'Eliminating self-employment's benefits'

“One proposal [the chancellor is reportedly weighing up] is to abolish the Class 4 NICs”, echoes chartered accountant Carolyn Walsh, referring to the rumoured tax raid, said to total £30billon.

“Or he will align the NIC regime for the self-employed and employed. It would likely include eliminating…the ‘benefits’ of self-employment. A hike on dividends looks almost definite.”

Mr Sunak threatened action against sole traders in March, when, unveiling a scheme to help them through covid-19, he said it was ‘getting harder to justify’ their lower contributions.

'Living off dividends'

But at the weekend, the Sunday Times claimed that an NICs hike will form just a single tier of the tax-raising package – a package which most economists are against if it is applied from this year (see Tuesday’s Treasury Select Committee Q&A with four economists from 10:24:25).

Nonetheless, the chancellor is tipped by the broadsheet to hike corporation tax significantly -- from 19% to 24%, and to align the Capital Gains Tax regime with the income tax regime.

Even more problematically for PSC contractors, Mr Sunak will “soar” the taxes of “family business that live off company dividends.”

A supportive editorial for Mr Sunak’s apparent Autumn plan has since been published by another newspaper, the Evening Standard.

'Sweeping tax changes'

Yet in the contractor sector, advisers are both alarmed and dismayed.

“[Any] proposal to end the low tax rates on dividends, which would mean abolishing the lower dividend tax rates, currently 7.5%, 32.5%, 38.1%, and instead pay normal income tax rates of 20%, 40%, 45%...would have a huge financial impact,” says Walsh, managing director of Andraste Accounting.

“[It would hit all those] freelance workers using a company and paying themselves through dividends -- a system intended originally to encourage entrepreneurship.”

She added: “The chancellor needs to raise billions to cover the support provided during the Covid crisis….but he doesn’t have to make sweeping changes to the business tax regime immediately. So [hopefully] these proposals, if they [do materialise], could be phased in over a number of years.”

'Very harsh for PSCs'

But even as just mere ‘proposals,’ Seeley Harris says they would fail the fairness test.  

“The government has been trying to put the NICs rate up for the self-employed for years and their last attempt in 2017 resulted in an immediate U-turn, so now [thanks to needing to recover from covid-19], they have the perfect excuse to raise the NICs level.

“But it would be very harsh indeed if they raise the rates on tax for the PSCs,” she said. “These companies received no [meaningful] government help at all [during the pandemic].”

'In tandem with IR35 reform'

Another adviser to contractors, who wanted to remain anonymous, said that with so many looming attacks on freelance working, for many, such contract work may no longer be viable.

“Whatever the chancellor decides in the Autumn…is coming in tandem with the IR35 reform and so called ‘disguised remuneration,’ [so some business-people] will probably not see any benefit in carrying on as they are.”

Shown the gloomy reading, Walsh, a former tax inspector, said there would likely be (legal) workarounds which contractors and other independent workers could employ to keep contracting successfully including, sole-person employers expanding into small employers.

“Worried freelancers and contractors could consider a firm change of direction, [such as moving] away from trading as one-person businesses,” she advised, “in order to ensure their future position is as well protected as possible in these challenging circumstances.”