In the words of the Chancellor, George Osborne, the aim of yesterday's budget was to "put the fuel into the tank of the UK economy." Fundamentally it was a budget, on a budget, for business. Our view is that compared to some recent budgets it was good news for freelancers and contractors.
The large company corporation tax rate is reduced from 28% to 26% from April and by 1% year on year thereafter until it reaches 23%. This is good news for end clients and will hopefully increase funds available for future projects.
Fuel duty was cut by 1 pence per litre yesterday.
Business mileage rates will rise to 45 pence per mile from 40 pence for the first 10,000 miles. This will help contractors who use their own car to get to site (provided they remember to put in a mileage claim).
Personal allowance increased to £7475 (£8105 in 2012/13). This will benefit those contractors who earn less than £42,475 in 2011/12. Higher rate taxpayers will not see any benefit because the rate at which higher rate tax is paid has been reduced.
Employers and Employees NIC will increase by 1% which will reduce the net pay of contractors paying themselves a salary.
The small profits rate of corporation tax is reducing by 1% to 20% which benefits those working through PSCs since the company will pay less tax.
The Office of Tax Simplification (OTS) has spent the past year looking at ways to reduce the complexity in the tax system and to ease the burden of tax compliance for businesses and individuals. The Government has reviewed the OTS recommendations and as a result intends to abolish 43 tax reliefs. Most significantly the Government is considering the integration of PAYE and National Insurance. A consultation process to consider the options will begin shortly. Whilst simplification is obviously welcome many contractor-focused bodies are keen to ensure that any changes do not remove the tax advantages of self employed working (including PSC) introduced to promote and assist small business and entrepreneurs.
An important aspect of the OTS's role was a review of IR35. A lot of time was spent considering whether to amend, abolish or retain the IR35 rules. Ultimately the Government has decided to retain IR35 because it believes to abolish it would result in a tax loss to the Exchequer. The Government has committed to improve the way IR35 is administered by:
- setting up a dedicated helpline staffed by specialists;
- publishing guidance on those types of cases HMRC view as outside the scope of IR35;
- targeting compliance activity by restricting reviews to high risk cases; and
- setting up an IR35 Forum which will monitor HMRC's new approach.
PayStream has a robust IR35 service which will clarify whether IR35 poses risk to you. If you require any assistance in this respect please contact our compliance team.
Following HMRCs defeat in the Arctic Systems case the previous Government indicated that it intended to introduce measures to prevent "income shifting" - that is the use of "B" shares or spouse salaries to reduce the overall tax paid by individuals running their own companies. No reference was made to this in the budget.
False self-employment in the Construction industry
A consultation exercise carried out in 2010 suggested that the Government may effectively terminate the CIS scheme for contractors. No proposals were carried through in the Budget.
Offshore trusts/EBTs -Tackling the avoidance of tax
The Government has reaffirmed its intention to deal with schemes set up to avoid tax. In relation to contractors it is focused on schemes using employee benefit trusts where a reward or a loan is used to reduce PAYE paid on what is effectively employment income. Contractors using such schemes should be extremely wary.
If you would like to view the complete 2011 Budget Report, please do so here.