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UK – Budget 2016 targets public sector contractors

17 March 2016

Chancellor George Osborne has delivered his Budget to the House of Commons for 2016 targeted at personal service companies contracting in the public sector.

Following an announcement in the Budget, from April 2017, liability for determining whether a contractor falls within IR35 will transfer from their limited company (e.g. Personal Service Company) to the engaging public sector organisation. However, this could fall on recruitment agencies where they are first to engage the contractor.

HMRC has announced that it will enter into a consultation process on this measure before its implementation so both the REC and APSCo will be lobbying the government.

“We urge HMRC to work with our industry to create a level playing field and ensure that those who choose to work flexibly are not discouraged from doing so,” Femi Ogunbiyi, Policy Advisor at the Recruitment and Employment Confederation, said.

APSCo responded in slightly more vehement tones. Samantha Hurley, Head of External Affairs commented, “While we support this in principle, HM Treasury has also said in the small print that when recruitment firms are involved, they will be deemed responsible for assessing employment status for tax purposes and consequently liable for the payment of taxes.”

“This is clearly unjust, because determining someone’s tax liability is highly complex. The IR35 tax rule, which governs the tax paid by PSCs, is not a simple test and requires detailed understanding of many aspects of a worker’s relationship with the client, and of a PSC’s day to day operations. But recruitment firms simply do not have sight of the reality of the working relationship.  It is, therefore, entirely unreasonable to expect them to make this decision, and be financially liable for it,” Hurley said.

“Deeming provisions in tax law have been challenged repeatedly in the courts, and clearly there is a huge principle of fairness that should apply to all tax payers, including recruitment firms,” Hurley said. “I believe that few, if any, recruitment firms will be willing to take on this type of liability.  This will stop the vast majority of PSCs from providing services to the public sector, significantly impacting its ability to access the specialist skills it so badly needs.”

“APSCo will consequently vigorously fight this unreasonable proposal on behalf of its members, and will be asking the Government to publish its assessment of the impact this will have on the delivery of public services, because I find it hard to believe they’ve properly assessed the effects,” Hurley said.

It was also confirmed in the Budget that the removal of tax relief for travel and subsistence expenses for employees working through an employment intermediary, will go ahead from 6 April 2016. Umbrella companies and contractor pressure groups had lobbied for this to be delayed or reviewed on the basis that contractors have little or no job security, and often take work further afield, making travel and accommodation costs a greater proportion of their expenses than for other workers. The Budget documents forecast an additional £765 million in tax revenue over the next 5 financial years as a result of these measures.

Many other key changes were included in the Budget including an announcement that Class 2 National Insurance Contributions (NICs) will be abolished for the self-employed.

Other changes include:

  • Entrepreneurs’ relief to apply on disposal of private held business asset when it is associated with a disposal of the business to a family member – with effect for disposals made on or after 18 March 2016. 
  • New lifetime limit of £100,000 on CGT exempt gains on employee shareholder shares (post 16 March 2016 agreements).
  • Additional obligations to deduct income tax at source from royalties paid to certain non-residents imposed from 17 March 2016.
  • Targeted anti avoidance rule in disguised remuneration legislation from 16 March 2016.
  • Simplification of Enterprise Management Incentive rules in relation to post 16 March 2016 rights issues.

From April 2016, there will be more changes including the reduction of capital gain tax (CGT) rates to 20% for higher rate taxpayers and 10% for basic rate taxpayers, but no change for CGT on residential property or carried interest. Corporation tax charged on loans to participators (s 455 charge) which are outstanding 9 months after year end increased from 25% to 32.5%. Clarification that a ‘fair bargain’ rule for benefits in kind apply where cash equivalent value is calculated by reference to tax rules rather than the cost to employer.

There will also be a number of other changes with dates that are to be determined.

Mark Beatson, Chief Economist for the CIPD (Chartered Institute of Personnel Development), has commented on the Budget.

“The Chancellor rightly said that “our nation’s productivity is no more and no less than the combined talents and efforts of the people of these islands” but went on to only talk of infrastructure and largely structural changes to education as the means to solve productivity,” Beatson said.

“Measures such as the Apprenticeship Levy and the National Living Wage in isolation are unlikely to deliver sustained improvements in productivity.  Financial measures can provide the incentive to increase productivity, but businesses usually need other types of support as well if they are to turn intentions into reality,” Beatson said.

Beatson also mentioned the falling unemployment rate, which was published yesterday by the Office of National Statistics and showed a 5.1% rate, the lowest since 2006.”

“The Government cheered today’s fall in unemployment, and rightly so, but we have to look beyond simply getting people into work. We have to look at how we’re developing people at work as well, and this must involve a focus on skills and improved leadership and management capability. The increased cost of doing business – through the National Minimum Wage increase, the introduction of the National Living Wage and employer pension contributions – could make employers more cautious about hiring extra staff,” Beatson said.

Beatson also addressed how the Budget could affect small businesses.

“There was plenty in the Budget for small businesses to welcome in the form of cuts to capital gains tax, relief on business rates and a further reduction in the rate of corporation tax.

“However, changes to taxation and balance sheets alone aren’t enough to make businesses thrive. Both government and employers really need to get under the skin of how people are performing at work, the barriers that prevent them from being productive and how we can improve the skills and potential of the British workforce. We know that incompetence or bad management causes about half of corporate failures and these Budget measures could even reduce productivity by extending the lives of badly run businesses.”

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