UK Budget Targets Contractors – We Want More Tax From You, says Osborne

As the ContractorUK website put it last week,

George Osborne launched a four-fold attack on the contractor community in his Summer Budget 2015, delivered earlier today, Wednesday July 8.”

There are some positives too for contractors with their own small firms; the Budget commits to lowering corporation tax for both large and small firms alike, as the rate will be cut to 19% in 2017, and to 18% in 2020.

But on the negative side, the moves stem from the government worrying for some time about the growth in people setting up what might be termed personal service companies - businesses that may well have only one director / employee, who carries out contracting and consulting work for clients through their company. I'm sure pretty much anyone reading this knows someone who works in this manner - and I suspect quite a few readers fall into that category!

Whilst the government likes to boast about the boom in entrepreneurship and new company formation, it also worries about erosion of tax revenues. That's because these firms can take income as dividends rather than salary (avoiding National Insurance), can phase income for efficient tax planning, and can offset expenses such as travel against tax.

Now that's all fine if it is a "real" business, but when this is really an individual who may be working for months or years on end for a single client, going into the client's office every day, using the client's IT, being supervised by a member of staff ... then the government, not unreasonably, says that this look very much like an employment relationship rather than a genuinely independent, entrepreneurial service provider.

So the measures announced in the budget are:

  • Higher tax on dividends, replacing the dividend tax credit with a tax-free allowance of £5,000. Beyond a fairly small amount, that removes the advantage of taking money out of your business in this manner rather than paying salary (indeed, the advantage may be gone altogether - we need to do the maths)!
  • Travel and expenses no longer tax deductible for those contractors who are “supervised, directed and controlled.” A consultation document has now been released.
  • The National Insurance Employment Allowance of £2,000 will no longer be given where the individual is the only employee of the company.
  • A further review of the regulations around real and disguised employment (IR35), which is apparently still not working well enough.

Now we don't philosophically have a big issue with any of this, but one major point does strike us immediately. Who is the biggest single employer in the UK of people with individual service companies ?

I'd put money on that being the UK public sector itself. If you are looking for "disguised employment," just poke around in pretty much any public organisation for a while and you will almost certainly find it. The Cabinet Office did clamp down on this a couple of years ago, but our feeling is that was focused very much on just senior people, not the mass of IT folk, project managers, policy advisers and the like who still work extensively in departments, agencies and NDPBs. We came across an interesting case the other day ... but let's save that for now.

In part 2 we will look in more detail at what effect the changes might have on the market, and make some suggestions as to what procurement people should be doing in response to the Budget changes.

Discuss this:

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.