Contractor predictions for Spring Budget 2023

The word ‘anxious’ is probably an understatement to describe how individual contractors feel about Jeremy Hunt’s Spring Budget on Wednesday March 15th 2023, mainly because of the turbulence last year -- but it does definitely reflect the mood of the contractor community as a whole.

A turbulent act to follow…

There has been much speculation around what we may see announced by the chancellor, but further tax cuts currently look unlikely given the still-unsettled economic climate.

What we do know is that his Autumn Statement 2022 was rife with so-called ‘stealth taxes,’ aimed at helping reduce borrowing costs and inflation.

Here, exclusively for ContractorUK, I will share my insights on Mr Hunt’s next potential raft of measures to be introduced at Spring Statement -- in just two weeks’ time, writes Joanne Thorne, technical compliance manager at SJD Accountancy.

Small company IR35 exemption could be up for discussion

We’ve heard rumours that we may see some movement around the small company IR35 exemption on March 15th, in light of the legislation behind the off-payroll reforms being described by many as confusing.

The current IR35 reforms apply to all end-user organisations within the public sector, but the reforms only extend to those organisations in the private sector classed as medium or large – two sizes which are determined by whether they meet two of the following three conditions:

• An annual turnover of £10.2m
• A balance sheet total of more than £5.1m
• More than 50 employees

Where a company is classed as a “small” business (meaning it does not meet two of these three conditions above), the responsibility to determine and correctly apply IR35 sits with the contractor/worker. So it’s ‘old’ IR35 of 2000 if your commercial client is ‘small.’

However, a lack of education and awareness around the small company exemption means the exemption has been largely misunderstood, leading to confusion for both clients and contractors around whose responsibility it is to decide the correct employment status of the contractor, and then apply the subsequent tax treatment correctly.

In an attempt to remove this confusion, we may well see the chancellor choose to abolish the small company IR35 exemption altogether.

Should this removal of the exemption happen, we could see many smaller businesses lumbered with the additional admin and responsibility to correctly assess and apply IR35, then understandably choosing not to engage with limited company contractors because they lack the internal resource or expertise to properly manage the relationship or, for fear of misinterpreting the rules. The current exemption means the limited company contractor determines their own IR35 status, with no risk to the ‘small’ company end-user.

Ominously, the removal of the IR35 small company exemption has been described to ContractorUK as the “obvious [next] step.” Other advisers have cautioned that such an extension would be ‘madness.’

More support for start ups

It would be good to see Mr Hunt introduce more incentives for new businesses, thereby providing a better environment for people who are thinking of starting their own company, but may have been put off by the financial difficulties of the past few years.

The Federation of Small Businesses has issued a public call for increased support for small businesses, including a review of the energy relief scheme for small business owners, many of whom will be feeling the pinch from the energy crisis.

Hopefully Hunt will extend fuel duty freeze

Amid speculation that fuel duty may also rise by 23 per cent -- lifting the price of fuel by 12 pence per litre (the proceeds from which would go towards government coffers), we’d like the chancellor to extend the existing freeze on fuel duty.

For the flexible workforce, contractors and other individuals who have to travel for work, an increase in fuel duty could leave many significantly out of pocket simply for commuting to their contracts or clients, potentially seeing the tiniest of business suffer.

A tax sweetener now we’ve kept the pill down (would be welcome)

The uplift of the income tax threshold to £12,570 as of April 2021 was a welcome move at the time, as it increased the tax free allowance. However at November’s Autumn Statement, Mr Hunt confirmed that these would be frozen until the 2027/28 tax year, meaning we won’t see this threshold increase in line with inflation. This, combined with the cuts to the tax-free allowance on dividends, was a tough pill to swallow for many contractors.

The Conservative government should now look at introducing measures that will enshrine higher tax-free thresholds and lower business rates to support contractors and small business owners who are already having their margins squeezed in the current economic downturn. 

Abolishment of Business Asset Disposal Relief?

Formerly Entrepreneurs’ Relief, Business Asset Disposal Relief (BADR) is a tax relief scheme that means you can pay tax at 10% on all gains on qualifying assets, with the effect of paying less Capital Gains Tax when you sell or dispose of all or part of your business.

Among the relief’s eligibility criteria, you must be operating as a sole trader or business partner and have owned the company for at least two years from the date of the sale.

BADR helps alleviate the tax liability associated with selling off part of or winding up a company. The abolishment of this tax relief will not be welcomed by limited company contractors ready to move onto the next stage of their career or even retirement. 

An extension to the Super Deduction Tax would be super

Introduced in March 2021, the Super Deduction Tax (SDT) offers a 130 per cent capital allowance for qualifying plant and machinery assets, and a 50% first-year allowance for qualifying special rate assets.

Due to expire at the end of March 2023, this tax benefit allows companies to cut their tax bill by up to 25 per cent for every pound invested. The Super Deduction Tax was initially introduced to incentivise businesses to invest in “productivity-enhancing” plant machinery.

Many contractors are hoping we will see this tax relief extended beyond its March cut-off, as it provided additional tax relief, facilitating a fantastic opportunity for small business owners to invest in newer, more efficient, market-leading equipment.

Chancellor -- small steps like extending the SDT’s lifetime will help promote much-needed trust in the current government from the contracting community, many of whom need a glimmer of hope that they will receive the government’s backing.

Contractors are looking for stability -- above all else (but wouldn’t mind a sweetener)

After the challenges of the past couple of years and the off-payroll reversal anxieties caused by Kwasi Kwarteng’s mini-Budget, the key message we’re picking up from contractors is that they do not want any further changes to what has already been announced.

Repeals by Mr Hunt to any of the tax stings, in force or incoming, may well be welcome if they are set to benefit the self-employed community, but the government needs to restore some authority, credibility and trust among the flexible workforce if they are to remain in favour.

Contractors need a period of financial stability in which they can accurately plan for the future of their business. During his time as chancellor in Boris Johnson’s government, Rishi Sunak was renowned for his ‘sweeteners’ at the end of every Budget statement -- we may see the current chancellor follow in his footsteps and offer up something that will help the government gain favour with one-person enterprises after a challenging couple of years. Only time will tell.