Alistair Darling yesterday unveiled his second pre-Budget report of this economic downturn to reveal a fairly neutral package for the freelance contractor, but not due to his design or intent.
Micro businesses, such as freelancers, will actually directly benefit from so little of the report, one advisor said, that it was as if they had “gone missing” in the chancellor’s mind.
Much of the new increases in duties, or tax clampdowns, for example, may potentially affect a freelancer’s bottom line, but so too could the tax deferrals or treats.
This isn’t because freelancers were singled out in the PBR, for better or for worse, but rather that their activities happen to have been “caught up” in the web of the announced tax changes.
Most of the tax reforms, advisors say, were inextricably linked to the deepest downturn in living memory coming ahead of a general election, which must be held by June.
Yet to refute the claim that his third PBR ignored freelancing, Mr Darling can point out that his speech trumpeted the UK for “having the most flexible labour market in Europe.”
However, some of the grounds which the state has previously cited to restrict how freelancers trade, via an umbrella, limited or jointly-owned company, remain firmly on its agenda.
From April 2011, the tax exemption of free/subsidised meals will be restricted, where an employer offers them to an employee in a salary sacrifice or flexible benefits arrangement.
The PBR says such arrangements let employees buy canteen meals out of pre-tax income, providing them “an additional tax and NICs advantage” - a growing bugbear of HMRC.
"NICs are probably the least understood direct tax, and let's be frank, it is a tax. However, it is a tax that HMRC has had a lot of success defending when it comes to regulation."
According to the PBR, some employers’ travel schemes also take advantage of the tax and National Insurance expenses rules relating to travel to a temporary workplace.
Where temps on the schemes are paid at, or near, the minimum wage, such arrangements are “potentially exploitative,” as they can affect their entitlement to earnings and benefits.
The government added that, as a result, HM Revenue & Customs would soon consult with the Department for Business, Innovation and Skills on proposals to tackle the “problem.”.
Roger Sinclair, a consultant at Egos, a freelance contract specialist, was unimpressed with the wording that the government used to explain the clampdown. He said:
“The ‘potentially exploitative arrangements’ they speak of, and are trying to prevent, save these temps tax and put more [pounds] in their pockets - who exactly is that exploiting?”
At the other end of the temporary pay scale, individuals or consultants earning over £150,000 will face a new 50p tax rate from April 2011, the PBR confirms.
No other changes to income tax were announced, yet the point at which people start paying 40% income tax will be frozen for a year in April 2012, penalising those earning over £43,000.
More pressingly, every taxpayer who currently fills in a VAT return should prepare for today’s rate of 15%, set in the last PBR, returning to 17.5% from January 1st 2010, as expected.
Simon Dolan, of SJD Accountancy said: “It was a stupid thing to do at the time, and a stupid thing to revert back on, but the state of the public finances gives the chancellor little choice.”
To shore up Britain’s balance sheet, the PBR proposes an extra 0.5 per cent on the ate of NICs for all employees, employers and the self-employed from April 2011.
The starting point at which national insurance is payable will also be raised to £20,000, meaning anyone earning more than this threshold will pay more in contributions.
“The additional half a per cent rise in national insurance will have an impact on umbrella workers, who already pay a fair amount of NI,” said Dolan.
It will have less of an impact on limited company owners, the accountant said, because they tend to take smaller salaries and are often non-employers.
But the Federation of Small Businesses condemned the move outright: “Going ahead with the proposed 0.5 per cent increase…will not encourage job creation within the small firm sector.”
To soften the blow to small companies, the chancellor announced he would postpone a planned rise in the corporation tax rate to 22% until April 2011, winning the FSB’s approval.
This higher rate was due to come into effect from April next year, but the SCR will stay at 21% to “provide further support” to 850,000 small businesses, Mr Darling said.
In this sense, the pre-Budget report is kinder to limited company freelancers than umbrella company workers, says Martin Hesketh, managing director of accountancy firm Brookson.
“I only wish that the deferral of the higher rate of small companies’ tax was done deliberately with that population of the freelance community in mind,” he said.
“Limited companies have been caught up in the natural ups and downs of the PBR tax changes, rather than being sought out as a genuinely valuable community that needs to be supported”.
Dolan preferred that not many small firms would rejoice at being able to put off paying more tax, partly as a scheme to defer payments exists already, and was extended in the PBR.
“With the PBR’s supposed handouts to small firms, there is not a single one which any owner is going to pin their hat on,” he said, including more ‘time to pay’ and the SCR deferral.
“It’s not much of a ‘good news story’ for the government to say that the increase in small companies’ tax is not going to happen – not yet anyway.”
In the absence of a mention in the PBR, ‘income shifting’ is another taxing issue still facing freelancers, particularly those running jointly-owned companies, warns the PCG.
It said: “The chancellor claimed that the UK has the most flexible labour market in Europe and yet…a categorical commitment to drop the ‘income-shifting’ proposals was not in the PBR.”
Mr Hesketh, of Brookson, explained: “He has not brought in tax clampdowns he consulted upon, such as those on umbrella and jointly-owned companies, because of politics.
“In other words, the government has decided that now is not the right time to bring out punitive regulations ahead of the general election.”
Similarly, chartered advisors at SJD said : “There’s nothing in the PBR about income shifting, or directly about umbrella companies. The chancellor didn’t ‘press the button’ on these clampdowns because he’s got bigger things to think about.
“If you’re not in the middle of the freelancing industry, as Mr Darling is not, then it’s just a fairly niche area with a relatively small amount of people and a limited amount of tax revenue to gain from tinkering with it, as the government have found out with IR35.”
Learning from its past tax-raising misfires, such as with the Intermediaries legislation, could indeed explain why the ‘family business tax’ is not in the government’s PBR, agreed Egos.
Mr Sinclair said: “They are looking for easy targets, for things that can easily be implemented with clear and certain end results, and then enforced across the board.
“Simple binary choices, rather than things that require exercise of judgment to assess whether, or not, there is a liability.
“It may be that they feel they have learned a lesson over IR35, when comparing expectations with results.”
Alongside “politics”, such a consideration may explain why the PBR did not introduce national insurance payments on dividends, or national minimum wage rules for limited companies.
Positively though, and by the end of 2010, small to mid-sized companies will be able to access a free online portal containing all public sector contract opportunities above £20,000.
Like other businesses, these consultancies may be able to access the R&D tax credit scheme for small and medium-sized enterprises, which was widened under the PBR.
From now on, the condition that any intellectual property deriving from the research and development must be owned by the company making the claim has been removed.
In a related move, the PBR says the government will introduce a new 10% corporation tax rate for all profits derived from patents in the UK from April 2013.
However, video games companies and development houses, which might benefit from the so-called ‘Patent Box’, were told by the chancellor that their demands would not be met.
The PBR says: “Government is not currently persuaded that the evidence is sufficiently compelling to justify the introduction of a tax incentive for the development of culturally British video games at this time.”
Yet alongside all other landline owners in the UK, these creative firms will be expected to pay a 50p monthly tax to fund high speed broadband, which is due to be extended to 90% of the population by 2017.
The resulting upgrade of the UK’s digital infrastructure will create “thousands more skilled jobs,” Mr Darling said, but officials have been unable to cite an exact number.
Some of the jobs will be reserved for self-employed freelancers, who were warned in the PBR that they face paying tax and NIC immediately, should they lose at the tribunals.
Pointing to the report’s small print, IR35 advisor Kate Cottrell said payment to HMRC would be immediate even if the freelancer intended to launch an appeal.
The former Inland Revenue tax inspector said the measure could affect the behaviour of ‘freelance’ workers hoping to take test cases to the High Court.
The PBR’s only other indirect mention of IR35, seen by the PCG as the ‘largest impediment to freelancing,’ was in reference to “false self-employment” in the construction industry.
The government said responses to a consultation paper on the issue would be published in the new year, but gave no word on whether its proposals might be extended to other sectors.
Freelance tax consultant Ray McMahon reflected: “HMRC have always had a concern about ‘disguised employees’ in certain industries, such as construction, finance and IT.
“Despite the recent Construction Scheme and IR35, they still have concerns that there are more contractors who should be considered employees.”
Not featuring any new clampdown on employment status, ‘income shifting’ or umbrella companies is why Kingston Smith says PBR 2009 is a relative escape for the freelance contractor.
The accountancy firm’s technology partner Paul Spindler said: “All in all the pre-Budget report appears to have been fairly neutral. The further increases to National Insurance will affect all, but there were no specifically targeted measures at contracting.
“This is welcome news for the sector, which has been the target of regular change to tax legislation over the past few years, such as the agency legislation, IR35 and the managed service company legislation.”
However, freelancers were ‘let off the hook’ only as “the chancellor has bigger fish to fry,” claimed Dolan, who said a new ‘tax on freelancers’ would have generated too little revenue for the exchequer.
Fresh anti-avoidance measures from HMRC should boost the Treasury coffers, perhaps through the new “Hidden Economy Advisory Group,” to be set up for HMRC to move people out of the hidden economy.
In the PBR, the department said it would also expand its Spotlights page, set out for taxpayers to see the kinds of arrangement that HMRC says it will challenge.
“The aim of these ‘buyer beware’ messages is to give potential users of avoidance schemes a better understanding of the risk they are taking,” the PBR says.
Despite this, Cottrell said, freelance contractors “have fared very well” in the PBR, given the scale of the potential changes which the chancellor could have introduced.
Yet overwhelmingly, the government’s underlying message in the PBR to the contractor and freelance workforce remains bleak, according to Mr Hesketh’s reading.
He regretted: “Freelancers are really just ‘caught up’ in the general ups and downs of the PBR’s tax adjustments, as opposed to having any measure focussed, or targeted, at them, which is disappointing. This signals that contractors and freelancers – a very important and valuable part of the population – have effectively gone missing.
“I’m still of the view that the government doesn’t have the right understanding of the freelance community; they still see too many people as tax avoiders and tax dodgers, as opposed to genuinely self-employed people who are helping to drive the economy in the right direction.”
Dec 10, 2009
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