The freelance marketplace is bracing itself for today’s pre-Budget report (PBR), amid fears that anyone paying less than others in tax or National Insurance will be hit.
Its author Alistair Darling, the chancellor, has already used the ‘fair share’ argument to signal why the 50p tax rate for those earning over £150,000 should start in April.
On Sunday, he used a BBC interview on the PBR to reiterate ‘fairer taxation’, saying voters would expect “the broadest shoulders to bear the greatest burden.”
High earners, then, are among those who the chancellor thinks the “burden of taxation should fall [upon] in order to [help] pay for the huge national debt,” says Abbey Tax.
In other words, individuals earning more than £150,000 are one of the groups which the PBR will target in a ‘fair’ way to reduce the deficit over the next four years.
The proposal, designed to “increase the tax burden on the wealthiest”, indicates that the PBR is likely to be dominated by a return to traditional Labour values, adds PKF.
In line with the accountant, freelancer advisory firm Bauer & Cottrell thinks that, behind the PBR, a “political thrust” will be driving a “fairer tax system”, free of “avoidance or advantage.”
As a result, and given the economic and political mood, the PBR looks set to hit anyone, not just top-earners, who pays comparatively less tax or NICs, the firm predicted.
This means a potential tax clampdown on much of the freelance sector – personal service companies solely or jointly-owned, and umbrella companies and their users.
“Freelance contractors will be bracing themselves for a raft of anti-avoidance measures in the pre-Budget report,” said Paul Spindler, technology partner at Kingston Smith.
“Particularly where income [is converted] into capital gains or where family businesses look to pay dividends to shareholders before the 50% rate is introduced.”
Even those freelance contractors whose annual earnings are under £150,000 but who still draw dividends appear “vulnerable,” if PBR 2009 seeks to raise tax, says Anne Redston.
The Kings College tax professor explained that such freelancers get dividends “NIC-free”, meaning that they pay “a smaller contribution to the exchequer than employees.”
Addressing this imbalance in the PBR, by imposing national insurance payments on dividends by a PSC, cannot be ruled out, agreed tax experts at Freelance World.
There is also likely to be little let-up for freelance consultants and other individuals facing the 50p tax, a growing number of whom are contacting B&C in the hope of reducing their future liability.
Those readying dividends before the 50p in the £1 tax rate comes into effect could face new anti-avoidance measures in the PBR, as could employees hoping to save by incorporating.
Pointing to small or micro businesses looking to distribute before April 2010, Kingston Smith reassured that what the companies wanted to do was “common sense and perfectly legitimate.”
But the government “won’t be happy about losing revenue and may look to put a halt to this practice” cautioned the firm’s head of entrepreneurial business Chris Lane.
Raising the income tax rate for individuals including freelancers on middle incomes would prove much more unpopular, particularly in today's fragile economy, the firm said.
“The government is more likely to raise National Insurance, which it doesn't class as a tax per se and which might therefore be less controversial,” said Lane.
Any hike to the national insurance levy, which does not require consultation to be announced, would be in addition to the hikes to NI already set to come into force in 2011.
But employers and employees will be more immediately concerned with the state’s latest stance on dispensations and expenses, which the PBR is expected to provide.
“Umbrella companies remain an efficient method of tax/NIC collection, so whether it would be in the government’s interests to introduce legislation which makes them uneconomic for the freelancer to use is highly debatable,” said Abbey Tax.
“However, it is in HMRC’s interest to ensure that expenses and dispensation policies are properly policed and depending on its attitude to small business, could we see an amendment to the 24-month or temporary workplace rule?”
Today's annual statement does indeed pose “a risk” to umbrella companies, B&C confirmed, but any further clampdown will more likely come from bringing them under the transfer of debt rules for Managed Service Companies (MSCs).
The firm’s founder Kate Cottrell added: “If there is an attack on the umbrellas, then there is likely to be some kind of counter legislation to prevent a mass exodus from umbrella to limited companies.”
Like those to prohibit jointly-owned companies from 'income shifting' , the government’s proposals to legislate against umbrella companies have been subject to industry consultation already.
For Cottrell, this increases the likelihood that the PBR will tackle what HMRC sees as abusive umbrella and jointly-owned companies, as the proposals are “ready to go.”
“Consultation papers are good indicators of changes” to come, Redston agreed, “so tax status in the construction industry and the expenses for umbrellas [are likely targets for change].”
Abbey Tax supported the theory of consultations acting as a guide to the PBR, saying the state’s thoughts on ‘fake self-employment’, and whether they could be applied beyond construction to the creative sector, may emerge.
However the unscheduled clampdown on ‘income splitting,’ which is also post-consultation, has proved difficult to implement and seems to have drifted into the long grass, said PKF.
The firm explained: “Shortage of funds may now mean that the proposal will resurface but it is more likely that this will be deferred until after the general election, when a more radical overhaul of the taxation of small businesses would be possible.”
Still, based on the consultation theory, the PBR could produce some new statutory tests to precisely define the type of worker which officials want to exclude from the Agency Workers’ Directive.
Aware that any definition the PBR offers may upset unions, who want a full adoption of the AWD, the national minimum wage rules may be extended to limited companies, B&C said.
But this reform, like changing the 24-month expenses rule, would “impact on the business operations of many” freelance contractors reminded Abbey, just at a time when such individuals need stability.
Yet the chancellor has many groups to please. “It is probably overoptimistic to think this will be a PBR which signals anything other than more pain,” the firm said, “– not just for all contractors, but for every taxpayer in the land.”
Alasdair McGill, managing director of Freelance World was just as downbeat about freelancers’ prospects under the PBR.
He said: “Given the UK's fiscal position, the Treasury has to increase tax revenues and at the same time reduce public spending.
“It's possible that we might see a return of the income shifting consultation, whilst it's not impossible that employers' NI could be introduced on dividends from PSCs. We expect expenses within umbrella companies to come under further scrutiny, whilst the HMRC penalty regime will be further tightened. All of which is bad news for freelancers and contractors.”
As the chancellor has limited financial room for manoeuvre, some freelancers will be hoping that, at best, the freelance marketplace escapes Mr Darling’s attention for juicer targets holding more revenue.
They will hope that the balance which he needs to strike between raising revenue and getting the UK through the recession, while trying to please voters, will result in no “radical changes” for contractors, as Redston predicts.
However freelancers and contractors were let off the hook in Mr Darling's last PBR, and most economists now agree that taxes will have to rise in the future, in spite of political debate about the best timetable.
Add to these circumstances the long history of chancellors using pre-Budget statements to tax freelancers, and Cottrell believes that “whatever comes out in the PBR 2009, we can all rest assured that we will be paying more.”
Dec 9, 2009
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