Draft Finance Bill Leaves Contractors in Limbo

As the dust settles on the Autumn Statement, the Finance Bill is revealed, but decisions on IR35 avoidance are left in limbo. Paul Day considers the impact of three key change areas…

The draft Finance Bill affirmed the Spending Review’s stance and proved to be quite a trouble-free afternoon in fact – unless you’re a contractor, of course. The government announced that it will go ahead with its earlier plans to prevent contractors taking tax relief on their travel to work costs. It was uncertain whether the government would include a clamp on those not paying taxes as a Personal Service Company (PSC) or those on tax avoidance within the IR35. The draft bill tells us that we do not have the definitive answer but the discussion has significantly moved on, identifying many of the changes that will happen post 6th April 2016.

Changes in umbrella company legislation from 6th April 2016

Contractors and temporary workers who operate through umbrella companies and who cannot show that the hirer is not exercising supervision and control (which in reality will be difficult to do) will be restricted in their ability to claim Travel and Subsistence (T&S) expenses at the time they are incurred, including the cost of meals or accommodation related to their travel. Currently, they can claim this on a weekly or monthly basis meaning no one is out of pocket at any point in time. As a result, contracted workers may be reluctant to travel and may also demand higher pay from their employers. For many, the likelihood is that they will have to revert to PAYE via their agency, therefore meaning umbrella companies could lose workers. As a business we remain interested to understand from the bigger umbrella companies what their operating models and value proposition post 6th April 2016 will be, as it is also true that up to 40 per cent of contractors and temporary workers do not claim expenses so umbrella companies may still have a legitimate role to play within the new legislation for this category of worker. For example, many recruitment companies do not have an internal PAYE payroll function meaning they will need to have an outsourced payroll service, which could be provided by larger umbrella companies in compliance with the new legislation, but at an increased operating cost that could be significant for smaller recruitment agencies. We have an in-house payroll service which ensures we pay workers correctly and on time.

 

Industry view

According to the Freelancer and Contractor Services Association (FCSA), it estimates that approximately 40,000 umbrella company workers will be worse off financially as a result of these changes. Trade body PRISM estimates that changes to the current system will hit contractors with a 20 per cent pay cut on average and expects the cost of the shortfall in net pay to cost employers £7bn if they are forced to plug the gap. Employers may choose to burden this debt on consumers by increasing prices.

Following the recent publication of the draft Finance Bill, a consultation period will last until February 2016, with responses highly likely. In fact, ten MPs already tabled an Early Day Motion (EDM) on 8th December for Travel and Subsistence Claims, led by Labour’s Sir Alan Meale. Although EDMs are rarely put forward to debate, it does suggest a cause of relevant unrest. Even a Yes2T&S campaign led by trade body PRISM has been instigated in the weeks running up to the Autumn Statement in an attempt to sway the minds of politicians.

 

IR35 – what next?

Over the last few months, IR35 has come under scrutiny, if only for the fact that the HMRC has estimated that £430m of tax is lost due to IR35 avoidance. The legislation is designed to tax workers who receive payments from a client via an intermediary, affecting all contractors who do not meet HMRC’s definition of self-employment.

However, the lack of clarity over the government’s next moves has left contractors and temporary workers in a state of limbo. The Chancellor did not reference IR35 reform in his speech and there is no mention of IR35 in the draft Finance Bill publications. It is believed that the government received 160 responses as part of its consultation and it is still yet to affirm its position on the matter. The good news is that it seems Mr Osbourne has heeded concerns and will not be rushing through any changes.

 

Freelancers breathe a sigh of relief, for now

The Chancellor forfeited the idea to push through plans in his Spending Review to place Personal Services Companies (PSC) on the payroll after a month. If the proposed legislation came into force it would have meant that 4.6m self-employed workers in the UK would have to go on the payroll for each of the clients they work for beyond one month. Newspaper sources indicated that the scheme to ban 90 per cent of PSCs from contracting for more than a month would raise up to £400m for the government. Essentially, a ‘one-month-then-payroll’ clause could make the operation of a freelance business untenable.

This had already sparked strong opposition from industry leaders and politicians, and there were even suggestions of a rebuff from Mr Osbourne’s own ranks. However, its omission from the Statement does not mean that PSCs are completely out of the woods; but only that it is highly unlikely that any rulings will be made before April 2016. No changes have so far been included within the government’s consultation documents, nor has the issue been raised with business leaders in the government’s regular IR35 Forum meetings. What we do know is that the Chancellor is determined to make IR35 more effective and this means collecting more tax for HMRC. Many PSCs have become accustomed to nasty surprises in the small print so eyes have shifted towards publications from the 2016 Finance Bill.

 

What to expect next

Making changes to legislation within any sector is likely to act as a deterrent to many, and the contracting sector is no different. Therefore, further tightening of the IR35 legislation, no matter how well meaning, is going to come up against resistance. In this case, the lack of clarity about the suggested changes, alongside modifications to areas like taxation and expenses, all make for opposition from those affected. Clients, recruitment companies and workers need to carefully follow the legislative changes through the consultation period. In reality the impact of the changes for the umbrella legislation will be introduced and felt early next year before 6th April 2016 as recruitment agencies such as ourselves will engage with clients and workers to ensure a smooth transition to comply with the new legislation.

 

Written by Paul Day, Finance Director at global recruitment specialist Omega Resource Group.