From April 2017 the entity which pays the contractor’s limited company, which is either the public sector body or a recruitment agency itself, will become responsible for assessing IR35 and deducting the resulting tax from payments made to the limited company.
If you are a contractor working for a public sector client, you may see PAYE tax being deducted from payments your company receives if it is believed that you are caught by IR35. Whilst this doesn’t mean that you are no longer able to contract through a limited company, your take home pay may be affected.
The impact that these changes bring will be dependent upon how your client interprets the IR35 rules and a contractor’s willingness to accept an assignment in the public sector will be determined by the engagers approach to IR35.
As usual with tax law changes there are some issues to be clarified, such as
- Defining what a public sector client is
- Exactly how PAYE can be withheld on payments made to a limited company
- How appeals against IR35 treatment can be resolved
Contractors working in the private sector will see no changes to the current IR35 regime.
Businesses will be required to use the new rate if their expenditure in a year is less than 2% of their VAT inclusive supplies, or for businesses with VAT inclusive supplies of less than £50,000, more than 2% but less than £1,000. Expenditure on capital items and motor expenses will be ignored in meeting this threshold.
We would expect some limited company contractors to fall inside this definition and therefore have to pay FRV at the higher rate of 16.5% from 1 April 2017.
The rate of corporation tax which applies to almost all companies in the UK will reduce to 19% on 1 April 2017.
The previous Chancellor had announced that the rate would be cut further in 2020 to 17%, and Mr Hammond confirmed this reduction will go ahead.
Speculation that he might cut the rate further proved unfounded; many businesses will be relieved to enter a period of relative stability for the remainder of the life of this parliament.
Further increases have been announced for drivers of company cars, with the rate on cars emitting 90g/km and more planned to rise by a further 1% from April 2020.
Rates up to that date have already been set, and show an annual increase of at least 1% of list price per annum over the period up to that date.
The expectation is that very low emission cars will benefit from an extra band on which lower rates of tax will be imposed, but for many drivers, the list price premium for alternative technology outweighs the reduction in benefit in kind rates.
It’s also important that the measures being brought do not impact genuine contractors.
Overall though, It is encouraging to see that the Government recognise that the world of work is changing and that the labour market is becoming more flexible.
It can only be hoped the value provided by the vast majority of work compliant contractors and freelancers is given the credit it deserves.