Tax War on Contractors
The Tories decalred a tax war on contractors in Chancellor Osborne’s.
It was, perhaps, the blackest day for contractors, finacially, since IR35 was introuduced in 1999 by New Labour.
Indeed, it may be worse than that, as IR35 left limited company contractors, which is the majority of contractors, unscathed.
Only those contractors who were seen as not in business in their own right were affected by IR35 – which was the minority.
Contractors Umbrella Companies
Virtually no one paid the IR35 tax, which raised a ridiculously low amoumt.
What most contractors did was to join a new phenomenon – the contractor umbrella company.
A whole industry sprung out of that.
By disguising contractors as permanent employees, umbrella companies were able to get tax relief for contractors on travel to their client’s office and a subsistence allowance.
It wasn’t as much as contractors were able to save before in tax relief when they all used limited companies.
It was, however, better than paying the IR35 tax, where contractors were taxed the full amount as if they were employees.
Chancellor’s Tax War
Now, the Chancellor has declared a tax war on contractors and has brought in several new measures to scupper contractors financially.
Firstly, he is disallowing travel and subsistence expenses being claimed by both umbrella company contractors and personal service company contractors.
Secondly, he has, effectively, increased the tax on dividends for owner-managed limited companies. He said he was taking on ‘tax-motivated incorporation’.
Contractors have traditionally used limited companies to pay themselves in dividends rather than salary. Dividends tax was less and they didn’t have to pay National Insurance on divdiends.
The Chancellor is trying to drive contractors out of limited companies by making it not worthwhile financially. He expects to save £2bn a year this way.
Thirdly, the Chancellor will stop those single employee limited companies from claiming the NICs Employer Allowance. At the moment contractors can offset this £2,000 allowance against employers’ NIC on their salary.
Chancellor to Strengthen IR35
Fourthly, in what could potentially be the biggest one, the Chancellor is to look at IR35 again as he does not think it is working properly.
One can assume that he wants more tax via this route. He had already said, in an Autumn statement, that he wants to Strengthen IR35.
He had already hired a team of 36 IR35 Compliance Officers when they were cutting staff in all other departments of HMRC.
Now it looks that he means to ‘honour’ his pledge to strengthen IR35.
He is going to consult with business leaders to see how he can strengthen IR35.
Tories v Labour for Contractors
Since IR35 was brought in by New Labour, the Tories have always been looked upon as the party of contractors and sole owner businesses.
Indeed, the Professional Contractors Group (now IPSE) pushed their agenda and even pushed out a press release just before the last election proclaiming that the Tories had promised to ‘look at’ IR35 again – fully expecting them to abolish it.
However, the Tories did ‘look at’ IR35 and decided that they would keep it.
Now, the Tories have gone much further than New Labour in their attack on the Personal Service Companies and the Umbrella Companies that they use. They have declared a tax war on contractors.
Umbrella Companies and New Labour
Under New Labour, HMRC and Umbrella Companies co-existed. Under New Labour, those who were not affected by IR35, and who used limited companies, remained unaffected financially.
It looks like this has all changed and the Tories have proclaimed a tax war on contractors and any tax savings that they get from using umbrella companies and limited companies.
Yesterday may well have been the blackest day for contractors ever – and the damage was done by a party that many contractors saw as friendly to them.
Blackest Day for Contractors
It looks like the Tories have declared a tax war on contractors.
So, if the Chancellor is seeking to scupper both limited company and umbrella company contractors financially in his tax war on contractors, what options remain for contractors?
One option, which is age old, but new to the contractor profession is to set up with limited partnerships. These are largely unaffected by the Chancellor’s Budget as he wasn’t taking aim at them.
For more information click on Limited Company Partnerships for UK Contractors