UK Contractors - Recent Tax Changes
The following ais the position as of December 2015 in respect of IR35 / Travel Expenses / Dividends:
In the July 2015 Budget Statement and the November 2015 Autumn Statement and Spending Review the UK Government announced significant changes to various tax regulations which will impact on independent contractors, trading through a limited company, which will take effect from the 2016/17 tax year, ie. from 6th April 2016.
Limited Companies 'Inside IR35'
If you provide your services through a limited company ("intermediary"), and your client (the business or organisation that you provide services to) exercises a significant amount of control and supervision over your work, and provides the equipment, then your company is likely to be regarded by HMRC as a Personal Service Company (PSC) under IR35 regulations
If this is the case you will pay more tax and National Insurance, very similar to if your client was your personal employer, and you were its employee.
HMRC IR35 Guidance
A substantial number of contractors have remained outside of IR35 and pay less tax. For some years the UK Government has expressed a desire to change the IR35 rules, and continues to be in direct consultation with many representative organisations.
This is just one example:
Employment Status Review
During 2015, several changes were announced "around the edges" of IR35 but not to the basic principles. Changes have been announced to Travel Expenses
- please see below.
Therefore, the accounting and tax community is still waiting for further developments which could be announced in March 2016.
In conclusion the underlying conditions as to whether or not your company is a PSC under IR35 have not (yet) changed.
Please note that HMRC have been given more funding to tackle "disguised remuneration schemes". Under the General Anti-Abuse Rule (GAAR) HMRC may charge penalties, in addition to the historic back-tax, where they decide that a company is an IR35 PSC, which had not previously declared itself so to be.
Please visit our web page for more information on IR35
Travel Expenses Changes from April 2016
The 2015 proposals are that contractors who are "supervised, directed or controlled" by their clients will be restricted when claiming tax relief on travel (particularly to and from home) and subsistence costs, and possibly disallowed altogether.
Such contractors include PSCs under IR35, and also those under an umbrella company.
The current proposal as it stands, is that if a company is not an IR35 PSC, then such a company is not affected by these proposals.
Dividend Changes from April 2016
The biggest changes in a generation to Dividend taxation will come into effect in April 2016.
These changes affect all people who receive dividends, not just contractors.
Key points are:
• The notional tax principle will be abolished - all dividends will be paid gross.
• There is a new £5,000 zero rate band - ie. the first £5,000 per year of dividends will be taxed at 0%.
• Once dividends over £5,000 are taxed, it will be on top of other income (eg. salary) for calculating higher rate tax. This means that the lower rate dividend will not apply if a person is a high rate tax payer from other income.
Dividends received over £5,000 will be taxed at the following rates:
• 7.5% on dividend income within the basic rate band
• 32.5% on dividend income within the higher rate band
• 38.1% on dividend income within the additional rate band
Although the details are not finalised, and have not become law yet, the general consensus among accountants is that most people, and particularly contractors, will pay more tax on dividends.
For our guide to Dividends, please visit our Dividends
24 Month Rule relating to Travel Expenses
The 24 Month Rule
applies to all UK employees - not just contractors.
Changes to the 24 month rule were expected but have not been announced. The March 2016 Budget may have more in store.
Note that from 6/4/2016 the 24 Month Rule will probably be no longer applicable to IR35 PSCs and umbrella companies because they probably won't be able to claim travel expenses anyway.
P11D Dispensation and Benchmark Scale Rates
It was announced in 2015 that the P11D Dispensation system will be scrapped. There is no news on its replacement, if any.
Consequently there is no further news on the future of the associated Benchmark Scale Rates.
Many contractors are with umbrella companies for 2 main reasons:
1. In good faith as they recognise that they fall under IR35 and they just want someone to sort it all out, do the paperwork and file their tax returns.
2. Because they have been pointed in that direction by an agency or prospective client ("employer").
In view of all the above changes, the options for contractors in umbrella companies
therefore would appear to be:
• Stay with the umbrella company
and lose travel allowances.
• Leave the umbrella company, set up their own limited company, declare it as an IR35 PSC
, lose travel expenses, but possibly save some money on accounting fees.
• Take a carefully advised decision, set up a new contract and working arrangements, and set up a non-IR35 limited company
and save on tax and possibly accounting fees. This is not a risk-free strategy from a tax perspective.
These webpages are intended to provide a helpful general guide, but specific professional advice should be taken before relying on it to take action.
Further Specialist Advice
For advice on more complex tax matters contact Paul Eaves on 01704 548698 or Email Paul Eaves
or visit the website Eaves and Co
is a specialist insurance company which advises contractors on their contracts and tax position.