The Summer Budget earlier this year saw significant and worrying proposals regarding IR35 and tightening the rules about claiming travel and subsistence expenses. Since then, the contracting world has been waiting with some trepidation for the Autumn Statement, in which more concrete plans would be laid out. In the meantime IPSE has been in close contact with the Government, sharing robust evidence gathered from our members, to explain how damaging the proposals would be to some of the smallest and most vital businesses in the UK. After all, it is these businesses that supply specialist skills to larger firms and public sector bodies, delivering critical projects and driving the economy.
Encouragingly, the Autumn Statement suggests that the Government has listened to our concerns. IR35 reform has been delayed while the Government rightly takes more time to consider the options. The travel and subsistence plans have been radically simplified from the original proposal. Welcome news indeed, but we are not out of the woods yet. The Government is still looking at IR35 and any future changes will affect tax relief on travel and subsistence.
The Autumn Statement had been widely anticipated to be a massive political and fiscal challenge for the Chancellor. It was expected he would frontload budget savings in order to balance the books by the end of the Parliament, and questions were raised about his commitment to running a £10 billion surplus during the run up to the announcement. Incidentally, October saw public sector net borrowing reach its highest level since the same month in 2009. Mr Osborne also had a new £4.4 billion gap to fill after tax credit cuts were rejected by the Lords. Given that half of public spending – including pensions, health, defence and overseas aid – is currently ringfenced, the Chancellor was left with little room for manoeuvre. Against this backdrop, IPSE feared the worst for contractors who might be seen as an easy target for a Chancellor desperate for revenue.
However, the Chancellor was handed a lifeline by the Office for Budget Responsibility. The independent body forecast a windfall of £27 billion from increased tax receipts and lower interest rates, allowing the Government to avoid a number of politically tricky budget cuts and tax rises.
So what does this mean for IPSE members?
IR35 - Changes Delayed
With a review to ‘increase the effectiveness’ of IR35 announced in the last Budget, IPSE, along with other organisations, was deeply troubled by rumours that after one month, so-called ‘personal service companies’ would be forced onto the client’s payroll after one month. It was also mooted that independent professionals would have to complete an online test after a set period of working with a client. Further suggested changes included shifting IR35 liability from contractors onto clients, which, under current supervision, direction and control guidelines, IPSE made clear could result in UK companies being unable to access to specialist skills on a flexible basis.
With no specific announcement in the Autumn Statement, however, the Government has listened to concerns and decided to reflect on the 160 responses to the IR35 discussion document. This issue has not gone away but it has been delayed, for now at least.
Significantly, the ‘Blue Book’ which is the Autumn Statement’s version of the Budget’s ‘Red Book’, does clearly state that the Government is taking forward the majority of recommendations from the Employment Status Report by the Office of Tax Simplification.
Those recommendations include the development of an online test, similar to the current Employment Status Indicator, and making the result binding. We expect to hear more on this proposal and we will continue to put forward our members’ views and work with Government, including through the IR35 Forum and Digital Services Working Group, to ensure a fair tax system for freelance businesses.
Travel and Subsistence - Plans Dropped, But Worrying Link to IR35
Also of huge significance to those working through their own limited company were proposals to remove tax relief on travel and subsistence expenses The proposed changes would have made the client responsible for identifying whether supervision, direction or control exists to determine whether the tax relief should apply.
IPSE made clear its strong objections to these proposals during the consultation period, including how damaging they could be to the wider economy in limiting the ability of independent professionals to undertake work that requires travel away from home. Particularly, these changes would put the UK’s smallest businesses at a huge competitive disadvantage as big consultancies would still be able to claim the tax relief while consultants working through their own company would not. This in turn would mean that companies and industries, such as North Sea Oil and Gas, that are based a long way from the major urban hubs, would not attract the specialist skills they need to succeed.
Happily, the Autumn Statement confirmed that the restriction will not apply to companies which are IR35 compliant. Contractors will continue to be able to claim tax relief for travel costs as long as they stay on the right side of IR35 (and subject to existing rules that any engagement at a particular site should is not expected to exceed two years).
So this is good news but it is very much dependent on the outcome of the Government’s IR35 review. If the IR35 rules become even more punitive than they are now, contractors will be hit by the double whammy of a much bigger tax bill and the removal of tax relief. IPSE will continue to robustly defend the ability of its members to work through their own company.
Housing – another measure which tops the bill
The Autumn Statement saw a number of other measures of interest to freelancers. The Chancellor doubled funding for housing to £2 billion, signifying the Government’s aim to build 400,000 affordable new homes by 2020. The Government will be relying on the 800,000 self-employed workers who power the construction industry in order to get the job done. Furthermore, the Apprenticeship Levy will now be set at 0.5% of an employers’ pay bill to raise £2 billion a year. However, it is essential that small and medium enterprises are given access to the funds – even if they don’t contribute directly – because they are best placed to train apprentices.
In addition, the Chancellor spared Entrepreneurs’ Relief, meaning that small business owners can still sell their business at a lower rate of capital gains tax. It is also welcome that infrastructure, including access to superfast broadband and road improvements, is still a priority for the Government. The Chancellor’s continued focus on the northern powerhouse, combined with further devolution and granting councils powers to cut business rates will, we hope, increase competition and boost business across the country.
Next steps – continuing to make the case for independent professionals
With no concrete announcements made about the review of IR35, IPSE will continue to liaise with government, making members’ views known and arguing for a flexible and supportive environment for small and micro businesses. This includes our conversations with the Department for Business, Innovation and Skills as part of its review on self-employment, which looks at the challenges self-employed people face setting up and developing their business, including juggling self-employment with having a family, buying a home or saving for retirement.
We will also make the case for the creation of the Freelancer Limited Company (FLC), an alternative optional company structure set out in our manifesto, developed in partnership with EY. Importantly, IR35 would not apply to the FLC, as businesses within the structure would have already demonstrated they are not disguising employment. IPSE believes the FLC would provide a benign environment for freelancing to flourish, offering significant simplification while also protecting the Exchequer from tax avoidance.
In the short term at least, it might be the case that no news is good news. However, with the Chancellor’s giveaways and softened cuts we advise members to take this good news with some caution.