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spring budget 2017

What Contractors Can Expect From The Spring Budget

With Chancellor Philip Hammond about to deliver the ‘Spring Budget’, we wanted to take a look at what temporary workers and their agencies can expect.

This is the final Spring Budget, which has been scrapped and replaced with an Autumn Budget to ensure tax changes now occur well before the start of the tax year. The Finance Bill will continue to follow the Budget, as it does now.
 

Here’s what we know so far:

 
IR35

We’ve all been aware of the IR35 changes to the tax system for some time now – and we’ve written a lot about the reforms and what the legislation means for contractors in the public sector, as well as the recruitment agencies placing temps in these roles. Here’s a recap of what the changes will mean for government workers:

  • The public sector organisation will now determine whether or not the contractor working through a personal service company (PSC) should be taxed as an employee or if they are a genuine contractor. It’s likely that risk-averse public bodies will simply put all contractors on the payroll in order to avoid the financial penalty of making a wrong call.
  • IR35 was created to prevent ‘disguised employment’. This means that a contractor will be taxed at a rate equivalent to if they were an employee if they are deemed to fall within the IR35 rules.
  • If it’s decided that IR35 applies, the party responsible for paying the contractor must ensure that the full employment and National Insurance Contributions (NICs) are deducted and paid over to HMRC.
  • Also, contractors caught by the new rules will no longer be able to write off a flat 5% allowance against Corporation Tax bills to cover IR35 admin costs.

 
Flat Rate VAT Scheme

In addition to the IR35 reforms, there are also changes to the Flat Rate VAT Scheme (FRS) that contractors should be aware of. The current system allows contractors to charge 20% on their invoices and later pay this back to HMRC at a lower rate. Depending on the sector they operate in this is usually around 14.5% when using the FRS system.

This will change from 1 April, when the percentage of the VAT paid to HMRC rises to 16.5% for limited cost business. HMRC have released a calculator to help businesses work out whether they’re a limited cost business or not. Contractors who find they incur only limited expenses in the running of their business may find themselves having to apply a higher percentage of VAT to their turnover. It is recommended that contractors seek professional advice to determine whether the Flat Rate Scheme is still right for their circumstances.

 
There are some rays of sunshine

The budget does contain some good news for limited company contractors. Philip Hammond will confirm that corporation tax will fall by 1% to 19% from April. This rate is expected to then fall by 1% year-on-year until 2020, when it will be at 17%.

 
Questions we need answers to

Some important questions remain about the implementation of the IR35 reforms. For instance, will those with contracts that were drawn up prior to the reforms be affected by IR35 changes? And will HMRC be able to retrospectively investigate engagements that are now deemed to be inside IR35?

 

We’ll of course be monitoring all announcements from the Spring Budget and will be sharing how it affects contractors. If you have any concerns or want to discuss how we can help in the meantime, do get in touch.

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