Other than confirmation that legislation will be introduced to restrict tax relief on travel and subsistence for contractors and freelancers working through intermediary companies (umbrella and personal service companies) there was little information within the Autumn Statement. As anticipated this means a further period of uncertainty until the draft legislation is published on 9th December.
The fate of changes to IR35 legislation remains unclear although HMRC has confirmed it is still considering responses to its discussion document and that “the government’s objective as set out in the discussion document is to find a solution that protects the Exchequer and improves fairness in the system without creating disproportionate burdens on business, or widening the scope of the rules.” Nothing suggests changes will not be made and nothing suggests they will not be introduced in April 2016.
There is no indication whether the draft legislation will include the universally condemned test of Supervision, Direction and Control, nor whether that test might be used for IR35.
So what do we know?
- The Finance Act 2015 Chapter 7a S289a (Salary Sacrifice) will delay payment of travel and subsistence tax relief as claims will be made through the self assessment system. This legislation will cause intermediary companies to change the method of calculating employees’ pay and the timing of when relief is claimed although it is unlikely to change the employment model. It will make contracting less attractive as it involves an unwelcome imposition of bureaucracy although compliant umbrella companies will, no doubt, take on this additional work.
- From April 2016 the government will introduce a new mandatory National Living Wage for workers aged 25 and above, initially set at £7.20 – a rise of 50p relative to the current National Minimum Wage (NMW) rate. The adult NMW rate is currently £6.70. and will continue to apply for those aged 21 to 24, with the premium added on top for those aged 25 and over. The government has asked the Low Pay Commission to recommend the level of the path of the National Living Wage going forward, with the target of the total wage reaching 60% of median earnings by 2020. On OBR forecasts a full-time NMW worker will earn over £4,800 more by 2020 from the NLW in cash terms.
- An Apprenticeship Levy will be introduced in April 2017 and add an employment levy of 0.5% to the intermediaries wage bill and payable through PAYE. This may cause some intermediaries to consider dropping an employment model for contractors and developing ‘hybrid’ solutions. These will be high risk schemes.
- On Tax Evasion and Compliance, we are assured that a number of new measures will be introduced to tackle tax evasion. The government will remove the need to prove intent for the most serious cases of failing to declare offshore income and gains. Civil penalties will be increased for deliberate offshore tax evasion including the introduction of a new penalty linked to the value of the asset on which tax was evaded and increased public naming of tax evaders.
- In terms of General Tax Avoidance, it is the government’s intention to introduce several new measures to reduce tax avoidance. Amongst the range of new measures, includes a 60% penalty of the tax due which will be charged in all cases successfully tackled by the general anti-abuse rule, as well as tough measures for those who persistently enter into tax avoidance schemes and abuse reliefs, by imposing restrictions on them accessing certain tax reliefs for a period.
What do we think we know?
Well, we think:
- There is no indication that HMRC have any intention of modifying or changing the test of Supervision, Direction and Control introduced in the Employment Intermediaries Travel and Subsistence consultation, despite widespread warnings from industry.
- There is no indication that HMRC will drop proposals for some form of debt transfer being imposed on the supply chain where contractors have not paid their ‘fair share of tax’ arising from the Travel and Subsistence legislation.
- There are a number of ‘promoters’ encouraging lower paid workers into personal service companies despite the Managed Service Company legislation introduced in 2007 and its provisions for debt transfer to agencies. We know HMRC are aware of this and we are assured enforcement action will be taken.
- The rumours suggesting freelancers would be forced onto the payroll after one month, trailed in the Daily Mail and Guardian newspapers, were wide off the mark and given the outcry are unlikely to be seen again.
- The government intends to "take action against those who have used or continue to use disguised remuneration schemes and who have not yet paid their fair share of tax." They will consider legislating in a future Finance Bill to close down any further new schemes intended to avoid tax on earned income, where necessary, with effect from 25 November 2015. This appears to be aimed at the growing use of ‘loan arrangements.’
And what don’t we know?
Lots that we can waste time speculating about:
- Critically we don’t know what will be in the draft legislation restricting tax relief on travel and subsistence for contractors and freelancers working through intermediary companies until December 9th.
- We still await guidance explaining how contractors can reclaim travel and subsistence tax relief delayed as a result of the Salary Sacrifice (s289) restrictions.
- HMRC’s stated aim not to widen IR35’s scope indicates that ‘Supervision, Direction or Control’ may be less of a prospect, as ‘SDC’ would extend IR35’s coverage. However changes to IR35 may well be introduced and, if so, we don’t know when – logically April 2016 to stop the flight of contractors from umbrella to personal service company, although it could be April 2017. We are already seeing a flight to personal service companies to take advantage of the flat rate VAT scheme. We know HMRC are aware of this!
Nothing changes until April 2016.
We will be working with FCSA, Professional Passport, EY, HMRC and others to understand the detail behind the Autumn Statement and we will keep our Agency Partners and Contractors informed as soon as we get clarification and confirmation of changes.
For more information, do not hesitateto get in touch.
01296 468 183