Budget 2018: what freelancers can expect
The much talked about Budget 2018 is now imminent -- this afternoon on October 29th, the first Budget to be held on a Monday since 1962.
But that’s not the reason that most tax experts, freelance services providers and self-employed consultants should have 3.30pm today marked in their diaries.
Changing IR35 now would be a rash decision
The government’s consultation into ‘Off-payroll working in the private sector’ concluded on August 10th. At the time of writing, the Treasury and HMRC have not published an outcome document on the consultation.
So it would be an ambitious move if chancellor Philip Hammond simply announced private sector IR35 reform today -- just over two and a half months after the consultation finished, with no formal government response.
We believe that coming to any kind of concrete conclusion about how the Intermediaries legislation in the private sector should change (it has been largely untouched since it took effect almost two decades ago), in such a short timeframe, would be a very rash decision.
But as we know with previous legislation affecting the freelancing, contracting and temporary work sector (such as the Off-payroll rules in the public sector, and the Travel and Subsistence ‘SDC’ framework), investing sufficient time is not a prerequisite of rolling out new legislation, at least where it is aimed at tackling alleged tax avoidance.
Therefore we reasonably -- and unfortunately -- expect private sector IR35 reform proposals to be announced, in some broad fashion at least, later today, exactly five months before the official Brexit date.
In short, Mr Hammond will use Budget 2018 to at least further lay the groundwork for the public sector’s IR35 reforms to be extended to the private sector, despite all the warnings against the extension, and regardless of the UK’s uncertain path of exiting the EU.
So just as the seminal Brexit vote in June 2016 didn’t stop the off-payroll rules hitting the public sector, there’s no reason to expect mere ‘talks’ about Brexit will stop the government forging ahead with private sector reform of IR35 either, especially if, as prime minister Theresa May claims, the ‘deal is 95% done.’
What we’d prefer
The best case scenario we’d like to see is to have full IR35 compliance in the private sector, but for limited company freelancers to continue to hold the responsibility for their own IR35 status.
Therefore the best move that the chancellor could make at this Budget is towards a middle ground -- implementing changes to IR35 in the private sector whereby limited company freelancers are required to take ‘reasonable care’ in assessing their own IR35 status and prove this via a reporting system. If the importing of ‘reasonable care’ into IR35 legislation is good enough to cover clients, surely it is good enough to cover freelancers and contractors too.
Under our preferred system, freelancers who already take on the burden of running their own company would be afforded the opportunity to prove they have the right to reap the rewards of self-employment. They wouldn’t have to leave their fate in the hands of another body who may or may not come to an accurate conclusion on their IR35 status.
IR35 is of course not the only item on the Budget table which is able to put a dent in the take-home pay and modus operandi of independent consultants.
What else freelancers and contractors can expect
1. Corporation tax and dividends freeze
Theresa May and her Conservatives previously pledged to cut corporation tax to 17% by 2020. It’s likely though that in this Budget, corporation tax will remain the same at 19% -- at least until a final Brexit deal is fixed.
Maintaining the current rate will ensure that Britain remains ‘open for business’ – or so we predict Mr Hammond will say, without harming government tax income when it may be needed most.
There’s an associated concern, however, and one we hope the chancellor heads off. Some small business groups have felt it necessary to include in their Budget 2018 submissions to the Treasury that the dividend allowance should be maintained. We agree that reducing the dividend allowance would be a step too far, even for a chancellor who has previously voiced concern about the exchequer-risk posed by incorporation.
2. Making Tax Digital moving ahead
HMRC recently announced that VAT-registered businesses with more complex requirements will not be required to adopt Making Tax Digital until October 1st 2019. However, the vast majority of businesses are unaffected by this announcement and will be required to use MTD from April 1st 2019, just three days after the official Brexit date. Despite the scramble it could cause for businesses to adjust, it seems pretty unlikely that MTD will be delayed any further.
3. Personal allowance pinch
We could be looking at either a stay or, controversially, a decrease in the personal allowance in this Budget. Mr Hammond has reportedly said that taxpayers need to contribute more in order to help the NHS. He’s also reportedly said ‘nothing is off the table.’ Yet it’s unclear whether this means that he wants to lower the personal allowance, basic and higher rate thresholds (and by how much), or simply wants to scrap previous plans to raise the starting thresholds.
4. Entrepreneurs’ Relief reduction
Capital Gains Tax is no stranger to the spotlight in Budgets and Finance Bills, with pre-announced changes already going ahead -- including abolishing the Annual Tax on Enveloped Dwellings-related CGT regime, which affected companies that own UK residential property.
Further speculation for change includes potentially trimming down Entrepreneurs’ Relief. It is likely that some tightening of ER will be declared in this Budget, aimed at reducing the incentive to pay less tax on the sale and liquidation of businesses and assets.
There is, unfortunately, no doubt that contractors, freelancers and the independent workforce as a whole will be a key focal point in this Budget, as the government moves to crack down further on perceived tax avoidance.
Tied to this, there’s also no doubt in our mind that IR35 private sector changes will be announced in the Budget, at least to signal that reform of the Intermediaries legislation in the commercial sector remains firmly on the government’s agenda. But whether this extends in today's Red Book to a total overhaul based on the public sector’s April 2017 framework, or a solution more fitted to the nature of private sector work -- as we have outlined, only time will tell. For the future of UK freelancing, we implore the chancellor to choose the latter.
28th October 2018