April 2017 will see the start of several changes directly affecting the way Professional Service Companies operate. In essence the traditional 'one man Limited Company' that has for years provided specialist skills to many large corporations and public sector departments, now faces a whole new way of working, renumeration and taxation compliance.
A new high VAT flat rate for service-based businesses
From 1st April 2017, “businesses with limited costs, such as many labour-only businesses” will have their VAT flat rate percentage increased to 16.5%.
A technical note published today by HMRC indicates that this will not be as simple as an increase in rate to trades that currently use the 14.5% rate. Instead, businesses will need to check how much they have spent on goods, compared to how much they make in sales, to see whether they have bought enough goods not to have to use the 16.5% rate.
Unfortunately, this feels like a very real complication to a scheme that was originally designed to simplify VAT for small businesses.
IR35 reform for the public sector confirmed
The Chancellor did not mention IR35 in his speech, and searching the full documentation for the term told us nothing, as “IR35” was not explicitly mentioned. However, we were very interested to read this highly relevant announcement about “off-payroll working rules”:
“Following consultation, the government will reform the off-payroll working rules in the public sector from April 2017 by moving responsibility for operating them, and paying the correct tax, to the body paying the worker’s company.” … “In response to feedback during the consultation, the 5% tax-free allowance will be removed for those working in the public sector, reflecting the fact that workers no longer bear the administrative burden of deciding whether the rules apply.”*
This raises the question of whether a public sector client will simply pay all of its contractors as employees in order to avoid any penalties for non-compliance. In that scenario, contractors would be taxed as employees but would not be entitled to employment rights, such as paid holidays and pension - the worst of both worlds.
The one positive point to note is that the government is not yet extending these “off-payroll working rules” to contractors who work in the private sector - but who knows whether that is yet to come?
Making Tax Digital: the elephant in the room?
The public consultation on the government’s Making Tax Digital initiative only closed a few weeks ago, so we were unsure whether there’d be any news on it today. In the end, the only mention of Making Tax Digital in the full Treasury report was:
“In January 2017, the government will publish its response to the Making Tax Digital consultations and provisions to implement the previously announced changes.”*
It will be interesting to see what changes, if any, are made to the original plans for Making Tax Digital, based on the responses to the consultations.
Small business opportunities missed
Disappointingly, the Autumn Statement made no mention of increased legal powers, as we had hoped it would, for the Small Business Commissioner to help small businesses collect what they are owed.
Nor was any kind of relief introduced for home working, which is a pity, given that home-based businesses are much less reliant on the road and rail infrastructure that the Chancellor had to promise a great deal of money to help prop up.
Better news: Class 2 NICs to be abolished
It was confirmed that from April 2018, Class 2 NICs will be abolished altogether, with self-employed individuals qualifying for entitlement to State Pensions through Class 4 and voluntary Class 3 NICs.
Since it represents a simplification, this is potentially positive news, though it remains to be seen whether it will ultimately cost more in the form of an increased rate of Class 4 NICs.
Looking ahead: government vs contractors?
Reflecting on today’s Autumn Statement, there were a few pieces of good news for small businesses. Increased finance is being made available for exporting, additional funds are being made available to borrow through the Small Business Bank, and Corporation Tax remains on track to fall to 17% by 2020.
However, when it comes to its latest set of announcements for contractors, we cannot help but wonder if this Autumn Statement shows that the current government simply does not support contracting as a way of working.
We will be publishing more detail around the confirmed IR35 changes soon. This will include advice on how to structure your business for existing contractors as well as options for those starting out as contractors for the first time.