What's in the Budget for freelancers?

For all the uncertainty that goes with budgeting for a country that appears to have only just pulled clear of a double-dip recession, it is certainly going to be a difficult one for the chancellor, George Osborne, when he announces the UK Budget tomorrow (Wednesday March 21^st).

On the one hand, Mr Osborne needs to stick to his budget deficit reduction plan, which shows him on track to borrow £7billion less than initially forecast (according to calculations reported yesterday by Ernst & Young’s Item Club). On the other hand, says Alex Henderson, tax partner at PwC, UK growth hasn’t been as good as expected, so the chancellor will be “wanting to do something to stimulate that,” despite having “limited room for manoeuvre.”

‘Interesting tricks’

Experts on freelance tax issues at In-Touch Contractor Accounting see it another way. From Mr Osborne “we can expect some interesting tricks,” they said, “[because he needs] to balance the need to raise money in these austere economic times with the equally important need to promote economic growth.”

As a result of the high fiscal stakes, the start-up and small business community is generally “expecting a great focus on macroeconomic policies” in Budget 2012, explained Northdoor, a London-based technology consultant.

“However, given that many of the green shoots we have seen recently have come from smaller businesses, such as tech start-ups” the firm’s chief executive David Ballard argued yesterday, “this should be reflected in the Budget.”

Limited company tax-saving row

Something that Rob Crossland, founder of umbrella company Parasol, doesn’t want to see is “a knee jerk reaction” to “recent media scaremongering” relating to personal service company usage and tax avoidance. Pointing to the offending coverage, which began with revelations about Student Loans boss Ed Lester, Mr Crossland corrected: “Setting up a limited company is not tax avoidance.”

Yet for better or worse, the consensus among freelance tax captains contacted by Freelance UK is that the chancellor will at least draw a line on the issue, potentially roping in IR35 and the new rules for its administration (due to take effect on April 6^th). So some addressing of the tax-saving permitted by limited companies, particularly where public sector individuals set them up to avoid paying their “full share” of tax, is anticipated tomorrow, but not necessarily in the chancellor’s statement in the House of Commons.

Business tax advisors at PKF agreed, and fear the worse. “Given recent revelations that senior officials in some public bodies are paid through personal service companies, it would be highly surprising if there was not some form of clampdown in the Budget,” they said.

General Anti-Avoidance Rule (GAAR)

The Emergency Budget in June announced the exploration of a general anti-avoidance rule, and that exploration is all but complete, meaning GAAR has no reason not to get a green light from Mr Osborne tomorrow.

But if implemented as outlined, a GAAR is unlikely to have a “significant impact on the day-to-day activities of many businesses,” in line with leading tax experts’ submissions to Freelance UK.

Accountants at PKF added: “Although the proposal will probably be taken forward in the Budget, the full public consultation exercise that the government usually carries out for legislative changes is expected to delay implementation until 2013.”

Aimed at what HMRC calls “highly abuse contrived and artificial schemes which are widely regarded as intolerable,” the rule is expected to provide more focussed ‘anti-abuse’ rules for income tax, corporation tax, capital gains tax and petroleum revenue tax.

As a result, PKF warned, a GAAR threatens to introduce “new complexities” for international groups who structure their worldwide operations outside the “large centre ground of responsible tax planning.”

Agency Workers Regulations

Although the government’s appetite for amending the recently introduced Agency Workers Regulations appears to be small, not least because it’s facing calls to streamline the much older Agency Conduct rules, two contractor captains have pressed the chancellor to tweak the AWR.

Adrian Marlowe, founder of Lawspeed, says the EU-inspired regulations should be amended with the effect of ruling out a potential employment status claim against a hirer by an agency worker.

And Rob Crossland, at Parasol, believes the AWR should be revised to incorporate a salary threshold, whereby any contractor, interim or freelancer earning £35,000 or more would be automatically removed from their scope.

Business taxes

A cut in the main rate of corporation tax, from 26% to 25% is already planned to take effect from April 1^st 2012 but, as he did in the last Budget, the chancellor may move faster and cut the rate to 24% (- currently planned for 2013/14).

In addition to the incoming reduction, the Forum of Private Business has asked Mr Osborne to cut the small firms’ rate (of 20p on profits under £300,000) at a similar level, in order to “reward successful businesses.”

A so-called ‘tycoon tax’ may be unveiled tomorrow, although its internal floating has already proved politically divisive in its short lifetime. Its most anticipated appearance is a flat-rate levy so, its Liberal Democrat backers say, it would be able to sting all wealthy business owners who exploit tax ‘loopholes.’

PKF reflected: “It is possible that the Budget may contain a large number of minor, but effective, restrictions on the use of existing tax reliefs and other changes that limit the tax planning options for wealthy individuals.”

SMEs, Self-employed and Creatives

For small and medium-sized enterprises, including the self-employed, the moves or announcements anticipated from Mr Osborne include:

· Adoption of most of the OTS recommendations (including simplified accounting requirements for 30,000 firms, traders and self-employed people, and disincorporation relief).

· A Patent Box. Advisor MacIntyre Hudson expects the government to take forward its scheme to reduce corporation tax to 10% for profits made on patented technologies. Less positively though, the need for businesses to understand which patents are owned by them means the scheme “may take a while to work efficiently,” according to the firm’s tax partner Patrick King.

· A tougher tax regime for company car drivers. Expected by the accountancy firm to take effect from 2014, the most likely victims were said to be those drivers who have taken low-emission cars via a salary-sacrifice scheme and are, in addition to the taxable benefit, taking a salary reduction to cover the employer's cost of leasing the car.

· A cut in VAT isn’t widely expected tomorrow, but would be on the cards if the Budget was under a Labour administration. Such a move, called for shadow chancellor Ed Balls, would draw support from the FPB, which has asked Mr Osborne to deliver a VAT cut targeted at the UK’s “labour-intensive industries”, such as construction.

· Extending childcare vouchers – possibly. Although the government has not responded to the call, a benefits provider this month urged the chancellor to extend childcare vouchers to the self-employed, saying the annual saving that arises (of almost £2,000) could be used by parents to help small ventures get off the ground.

· Tax breaks for video games makers – potentially. Mr Osborne previously scrapped a Labour-conceived model of tax relief loosely based on the film sector tax relief system, but he has come under renewed pressure this month to reconsider it or offer an alternative.