IR35 Changes

The anticipated changes to IR35 are due to start from April 2020, bringing private sector contractors into the same position as the public sector contractors have had since 2017.

As background, IR35 seeks to tax those working through a personal service limited company as ‘deemed employees’, and so effectively pay employer’s and employee’s NI.  Currently the risk of IR35 falls with the personal service company, ie your limited company.  What the rules seek to do is to put the risk on the engager, that is to say your end client.

From the very brief notes here it would seem

1. There will be yet another consultation in the next 12 months
2. HMRC are going to have  another go at the much derided CEST tool, which aims to determine if a  contractor is within IR35 or not. The tool has a heavy bias towards contracts being inside of IR35, and studies using the outcomes of known IR35 cases have shown it simply doesn’t work properly.
3. Oddly this measure does not apply to small businesses engaging contractors. So if you are a small business (and all my clients will be) and have subcontractors who bill you, they will remain liable to any IR35 claim by HMRC.

In all of this it is easy to lose sight of the main plus point for the Contactor: certainty.  You will lose the risk of IR35. The question is of course is if you will be forced onto payroll, and lose the benefits of running your own service company.

A  key point here is that the situations caught by IR35 are unchanged, all this does is change who’s liability it might be, and we are no closer (the hopeless CEST tool aside) than in 1999 to being able to determine if a contract is inside or outside of IR35.

The public sector reacted to the 2017 changes with panic, assuming everyone was caught by IR35 and ought to be on PAYE.  I am not so sure the private sector will react in the same way.   Moreover I don’t see how HMRC are going to have much more luck pursing IR35 cases with big business who tend to have deeper pockets to mount a defence than individual contractors.

Given the exemption for small companies, it seems like an obvious loophole to be exploited by joining together 2 or more contractors working for a single organisation, into a single vehicle to side step the rules.

Expect this to run and run right up to the April 2020 deadline, and well beyond.

Capital Allowances

There is a temporary increase in 100% first year capital allowances from £200,000 to £1 million from 1st January 2019.

After several years of calm we are back to the tinkering with this allowance, as it seems to scan well in the press.   The intention is clear – encourage investment in the next 2 years – however evidence suggests it simply doesn’t work.  The issue for our clients is the method of computation  which “chops” accounting periods and can produce an unexpected tax problem.  If for example you spend £20,000 in December 2018, and have a 30th November year end, only £16,667 gets a full 100% capital allowance, even if that is your only spend in the financial year.

Employment Allowance

The £3,000 that small employers enjoy as a discount to their employer’s NI bill is retained, but only for business with a bill of under £100,000.

There is little evidence that this measure has created many jobs, so the allowance was widely expected to be withdrawn or scaled back, so good news for small and medium sized employers to hang onto this sum.

Entrepreneur’s Relief

Entrepreneur’s relief gives a 10% rate of Capital Gains Tax on disposal of business assets if certain conditions are met.  The minimum period of ownership of the asset is to be returned to 2 years from the current 12 months, for disposals after April 2019.

It was expected that this very generous relief, which is widely abused by tax avoidance schemes, would be tightened, but this is rather minor.   I would have expected the period to be extended to at least 3 or even 5 years. Few genuine entrepreneurial business run for short periods. The rate of tax is also very low; most clients are rather surprised by it being just 10%.   This measure cost £2.7 billion last year and seems ripe for plundering.

Making Tax Digital Difficult

This was notable for not being mentioned given it is supposed to be the flagship project of HMRC.

See Appendix two for more on this topic. In brief as things stand there is going to be a new system for filing VAT from April, and your bookkeeping will need to be both digital and contain a “digital link” to the VAT filer rather than typing the number into HMRC’s portal as now.

Capital Gains Tax Up

There are two measures which will increase taxes on former homes that are now let out. Both start from April 2020.

1. Currently if you let a property that was once your home, the final 18 months (36 months prior to April 2014) of occupation receives  automatic Principal Private Residence relief .  This is to be reduced to 9 months from April 2020.
2. Lettings relief, currently £40,000, is to be abolished, unless you let part of your home to a lodger.

This will mainly impact ‘casual landlords’ letting a property due to not being able to sell their home.  The same landlords are also hit by the penal SDLT rules.  It will also potentially hit those who have been unable to sell their home within 9 months of moving out, and who have had no profit motive at all, albeit you will still have your personal CGT allowances too of upto £12,000 per person.   For those moving to a care home, the relief remains at 36 months.

This may affect computations we have made for clients utilising these two reliefs, but only if you plan to sell after April 2020.  If you think this mean you, let me know and we can recompute it for you.

There is no impact if you are a commercial landlord who has never lived in the let property.

Earlier payment deadline for CGT

From April 2020 HMRC want all sales of residential property to be notified and paid within 30 days of sale.

The measure essentially calls for a “payment on account” for CGT, and builds on the current system for non-residential landlords.

Whilst not new, this measure has been slowly gathering pace.

The aim is to get tax in quicker, given the normal payment period is between 10 and 22 months after the sale.   The main issues with this policy are the fact it is an “extra return” which taxpayers are likely to be oblivious too, and that the amount of CGT due will not generally be known until there is certainty over the total income for the year. The tight turnaround will mean substantial planning, and crucially letting us know BEFORE you sell the property so we have plenty of time to work out the tax bill, and get it filed and paid in time.

The main issues with non-residents has been the lack of trigger event that a return is due. Often we don’t find out about a disposal until we complete the relevant tax return.

Rent-a-Room Relief

As widely trailed, changes to legislation confirm that “rent a room” only applies where there is ‘shared occupancy’  of the property.  That is to say the owner also lives in the same house, at the same time.

This has been brought in to clarify some perceived abuse by those using Air BnB when the owner was absent for long periods.  Many tax advisors already interpreted the current legislation to apply only when letting part of the home, and not your whole home when absent but this makes it absolutely clear.

Income Tax Allowances Up

The income tax threshold has been raised again to £12,500, and the higher rate threshold to £50,000 for the tax year 2019/20.

The rates will be frozen for 2020/21, and increased by CPI (which is lower than RPI) thereafter.

This brings forward the election pledges by 12 months, but seems to be little other than electioneering given the current betting odds of 2:1 of us being  back to the polling booth by the end of 2019.

The costs for this measure are given as a whopping £2.8 billion for 2019/20, or £14 billion over 5 years which is the preferred measurement term when talking about spending increases.

In terms of cash in your pocket, for a husband/wife limited company paying out £50,000 or more each, that is a combined tax saving of some £1,924, so significant sums for higher earners.

Digital Services Tax

There was a new announcement with plans for a fairly early stage 2% tax charge on revenues from April 2020.    This is planned to raise a rather modest £1.5 billion over 4 years, and is not applied to turnover, but the revenue or commission earned by the platform.

This would appear to be in response to digital platforms diverting profits out of the UK and thus avoiding paying corporation taxes.  It’s early days, but this could be the thin end of a rather thick wedge. Or it could just be a minor fig leaf to cover the huge structural issues in this area, which are more of an international cooperation issue than a UK one.

It was stated this would only apply to large organisations.

Fuel Duties Frozen

For the 9th year in a row, fuel duty is frozen.

Whilst no-one likes to pay more for fuel, this seems slightly incongruous with the UK’s commitments on both air quality and climate change. We are supposed to be choosing small, highly fuel efficient vehicles.  Instead we have seen much larger vehicles become the norm on the roads suggesting that fuel is relatively cheap.   Unpopular it might be, but it seems an easy win for both tax revenue (£880 million in 2018/19) and the environment.

HMRC preferred debtor status reinstated

In a fairly obvious move, preferred status on winding up is reinstated from April 2020, which means on winding up a limited company, HMRC get paid before other creditors.

I was baffled when this status was removed in 2003, and remain baffled it has taken this long to be reinstated.  It’s a very sensible move and mitigates somewhat against unscrupulous businesses avoiding paying their taxes through insolvency, with director’s ranking alongside HMRC for payment.

PFI Dead

Public finance initiatives are to cease.

This is a long running subject of my ire, hiding government borrowing ‘off balance sheet’ and paying through the nose to a third party to finance something governments could have financed much cheaper themselves.   There has been little appetite for PFI in the last few years, given the savaging from the National Audit Office, so it’s good to know this is now officially “dead”.  Its legacy still lives on in many existing contracts, and other “off balance sheet” finance such as student loans.  I should point out this was originally a Labour policy happily adopted by both sides of the house.

Some Key Allowances for 2019/20

• Personal allowance up to £12,500 from £11,850
• Higher rate threshold up to £50,000 from £46,350 (including the personal allowance)
• Personal CGT allowance up to £12,000 from £11,700
• Corporation Tax stays at 19% (17% from April 2020)

What hasn’t changed?

• VAT threshold frozen at £85,000 to at least April 2021
• Mileage stays at 45p for business use of private car under 10,000 miles, and 25p for additional miles
• Insurance Premium Tax – stays at 12% (after rapid rises)
• IHT threshold remains at £325,000
• £100,000 threshold for loss of Personal Allowance remains (frozen since 2010)

As the PreBrexit budget that isn’t really, I was surprised to see the budget moved forward from December, rather than waiting until (say) January when a deal has finally been done.  Apparently we may well be doing it all again in March once we actually know the outcome of Brexit.

“Spreadsheet Phil” seemed in a good mood, and has plenty to play with, with higher than expected tax receipts and the public sector being squeezed so hard it isn’t spending very much.  Despite this debt is still growing in cash terms, the country having borrowed £40 billion to the end of March 2018, and £20 billion from April to September 2018.  Total debt £1.8 trillion as a percentage of GDP has fallen slightly, but it’s very slight and stands at 84%.  Total liabilities (including PFI and pension rights) are £4.3 trillion!

I am particularly concerned that the tax revenue increases may be short lived; tax receipts are very much a  lagging indicator, based on profits earned up to 2 years ago. Growth in this past 12 months is at best sluggish with lots of businesses “treading water” awaiting the outcome of Brexit.

The front bench saw Mrs May and Sajid Javid flanking, with Liz Truss tight in plus  David Lidington (I had to look that one up)  lurking on the other side.  More notable were who wasn’t there, with so many departures from the Cabinet.  12 months ago it was Boris, Rudd and Damion Green, with only Javid still there.

On tie watch it was rather lilac than blue, which perhaps reflects the fact there was some ‘red’ in this budget with more cash for the NHS, albeit not much.

Phil rattled through a bewildering number of the minor “newspaper headline” giveaways, and had another run out as a stand up comedian seemingly giving tax relief to public toilets, just to get a gag out of it, but my favourite graphic on the BBC coverage was “£650 million for social care, £1 billion for defence”, which looked more like a satirical sideswipe than a genuine policy.

Comrade Corbyn in a bright red tie was on the attack, and predictably was upset about the alleged end to austerity given what is happening at the sharp end with Universal Credit.   Pantomime miming from May and Hammond brought us back playground boos and calling out which had been largely absent from Hammonds speech. I don’t recall the Speaker intervening at all to this point which makes a refreshing change.   Corbyn pointed out that growth forecasts just 2 years of 2.1% are down to 1.6%. He pointed out the funding for mental health and the NHS is much lower than independent expects claim is required to tread water, let alone improve things. He also pointed out the problems with the police, prisons, teaching and pretty much any other public sector organisation. He ended on the failings to meet environmental targets, or at least I stopped listening at around then.

In summary we have quite a big “give away” budget to the tax payer as a whole but whilst there is some money for the public sector it barely touches the sides compared to previous cuts, and still leaves many services poorly funded.  The end of Austerity? For some perhaps, but certainly not for all as was claimed at the start of Hammond’s speech.

I normally publish the following tables to give typical extraction strategies undertaken by small Limited Companies. These give the maximum director’s bonus and dividend combinations for company directors to each key “stop” point, of (a) staying basic rate; (b) preserving child benefit; and (c) loss of personal allowance at £100,000 gross income.

This is getting more complex as time goes on, so please treat this as a “loose guide” as your circumstances may of course be different.

Directors Wishing to Stay Basic Rate

Increase in drawings: £3,650

Increase in tax: £225

Directors Wishing To Retain Full Child Benefit

Decrease in tax: £962 (Due to more generous higher rate threshold)

Directors Wishing To Preserve Personal Allowances

Decrease in tax: £962

Alternative Way of Looking at Extractions for Your Limited Company

Your gross income (dividend+salary+other income) should be:

£50,000 if you want to stay basic rate

£50,000 if you want to keep all your child benefit

£100,000 if you want to preserve all your personal allowance

£150,000 if you want to avoid the additional (45%) rate of tax

You can then use the following rules of thumb for how much tax to keep back:

We are another year on with this project, and to quote the recent House of Lords select committee: “I have a feeling of deja vu”.

The VAT element of this is supposed to go live in April 2019, but the public pilot which ought to have started in April 2018 has only just been turned on, and we still have no access to the project to properly test it.

HMRC are insisting it will all go ahead, with no issues.  Everyone else is somewhat sceptical.

Accountants such as myself have been campaigning against mandation of the project, and along with 5 others I was privileged to be invited a few weeks ago to contribute to a private session of the House of Lords Select Committee and provide evidence on the project.  The ammunition supplied was used in a session last Monday to give HMRC a fairly firm rebuke which is available if you have an hour or so to spare here.

What I don’t know at the time of writing is if the Lords have used their influence to further water down or delay the project.   The fact Hammond didn’t mention this flagship IT project at all in his speech, did suggest he is distancing himself from the whole thing.

The official line is this is still happening from April 2019 for VAT registered businesses, the practical effect of which is the closure of the current VAT portal to be replaced with third party software. The first affected return would be the quarter ending June 2019.

My notes from last year require little updating:

As a recap the idea was to make pretty much everyone use commercial accounting software for their bookkeeping, and file four quarterly returns and one final return each year, rather than just the one tax return (which will still need doing!), thus saving you time and raising more tax revenue. Obviously.

The latest thinking at this stage is that:

1. This will apply ‘initially’ only to VAT registered businesses.
2. The data contained will be not much more than we report anyway for VAT purposes, but there are requirements to store certain data “electronically”.
3. There seems to be no link from this data to the data filed separately for Corporation Tax or Self-Assessment which is essentially the whole point of MTD originally.
4. HMRC will not provide the software to file, you will have to buy this functionality either as a freestanding system, or as part of an accounting package.

Or in other words it’s a rather expensive replacement for the current VAT filing system which, whilst it could be improved, is quick, fairly easy to use, and crucially free.

From your client point of view, I think this will be very much “James’s problem” and we will see for those of you few masochistic clients who like to file their own VAT if there will be a cheap product you can use, or if you will need to use our agent software to file it.

The most likely end to this sorry tale is to curl up in an multi-million pound corner somewhere along with the rest of the big ticket failed IT projects finding expensive ways to solve problems that probably don’t exist.