Budget, DMS Posts, Tax

Summary of Budget 2020: Key points at-a-glance

Here is a summary of the main points.

Coronavirus and public services

  • £5bn emergency response fund to support the NHS and other public services in England
  • All those advised to self-isolate will be entitled to statutory sick pay, even if they have not presented with symptoms
  • Self-employed workers who are not eligible will be able to claim contributory Employment Support Allowance
  • The ESA benefit will be available from day one, not after a week as now
  • £500m hardship fund for councils in England to help the most vulnerable in their areas
  • Firms with fewer than 250 staff will be refunded for sick pay payments for two weeks
  • Small firms will be able to access “business interruption” loans of up to £1.2m
  • Business rates in England will be abolished for firms in the retail, leisure and hospitality sectors with a rateable value below £51,000
  • £6bn in extra NHS funding over five years to pay for staff recruitment and start of hospital upgrades

Personal taxation, wages and pensions

Pay slip
  • The tax threshold for National Insurance Contributions will rise from £8,632 to £9,500
  • The move, first announced in November, will take 500,000 employees out of the tax altogether
  • Those earning more than £9,500 will be, on average, £85 a year better off
  • 5% VAT on women’s sanitary products, known as the tampon tax, to be scrapped
  • No other new announcements on income tax, national insurance or VAT
  • Tax paid on the pensions of high earners, including NHS consultants, to be recalculated to address staffing issues

Alcohol, tobacco and fuel

Man paying for a pin of beer
  • Fuel duty to be frozen for the 10th consecutive year
  • Duties on spirits, beer, cider and wine to be frozen
  • Tobacco taxes will continue to rise by 2% above the rate of retail price inflation
  • This will add 27 pence to a pack of 20 cigarettes and 14 pence to a packet of cigars
  • Business rate discounts for pubs to rise from £1,000 to £5,000 this year
Men and a woman with laptops
  • System of High Street business rates to be reviewed later this year
  • Firms eligible for small business rates relief will get £3,000 cash grant
  • Entrepreneurs’ Relief will be retained, but lifetime allowance will be reduced from £10m to £1m
  • £5bn to be spent on getting gigabit-capable broadband into the hardest-to-reach places
  • Science Institute in Weybridge, Surrey to get a £1.4bn funding boost
  • An extra £900m for research into nuclear fusion, space and electric vehicles
  • VAT on digital publications, including newspapers, e-books and academic journals to be scrapped from December

Environment and energy

Plastic bottles
  • Plastic packaging tax to come into force from April 2022
  • Manufacturers and importers whose products have less than 30% recyclable material will be charged £200 per tonne
  • Subsidies for fuel used in off-road vehicles – known as red diesel – will be scrapped “for most sectors” in two years’ time
  • Red diesel subsidies will remain for farmers and rail operators
  • £120m in emergency relief for English communities affected by this winter’s flooding and £200m for flood resilience
  • Total investment in flood defences in England to be doubled to £5.2bn over next five years
  • £640m “nature for climate fund” to protect natural habitats in England, including 30,000 hectares of new trees

Transport, infrastructure and housing

Traffic on the A303 near Stonehenge
  • More than £600bn is set to be spent on roads, rail, broadband and housing by the middle of 2025
  • There will be £27bn for motorways and other arterial roads, including new tunnel for the A303 near Stonehenge
  • £2.5bn will be available to fix potholes and resurface roads in England over five years
  • Further education colleges will get £1.5bn to upgrade their buildings
  • £650m package to tackle homelessness, providing an extra 6,000 places for rough sleepers
  • Stamp duty surcharge for foreign buyers of properties in England and Northern Ireland to be levied at 2% from April 2021
  • New £1bn fund to remove all unsafe combustible cladding from all public and private housing higher than 18 metres

DMS Posts, Tax

An essential IR35 briefing for contractors

IR35 legislation allows HMRC to collect additional payment from contractors in certain circumstances. The way in which IR35 operates in the private sector is set to change and this could have a significant impact on many contractors across the UK. This guide provides an overview of IR35 legislation and what it means for all contractors, along with an explanation of the anticipated changes in the private sector.

What is IR35?

IR35 is a piece of legislation designed to seek additional payment from contractors who HMRC believes are working in “disguised employment”. This is when a contractor’s working arrangements and contract are similar to those of an employee but, unlike an employee, the contractor enjoys the tax benefits of working through an intermediary, such as a company or partnership. When a contractor meets the criteria of disguised employment, they are deemed to be “inside IR35” and are required to make additional payments to HMRC.

When is a contractor deemed to be “inside IR35”?

The question of whether a contractor is deemed to be inside IR35 depends on a variety of factors relating to both the contract itself and the contractor’s working practices. There are three employment tests designed to help contractors and engaging organisations make this assessment, along with a number of additional factors that HMRC takes into consideration.

The employment tests

The “direction, supervision and control” test

This test focuses on the level of autonomy given to the worker. HMRC considers contractors to have more autonomy when it comes to choosing what work they do, while employees are more likely to be assigned tasks by their employer. This does depend on the individual’s skill and expertise, however, as a highly skilled employee is likely to enjoy a greater degree of autonomy than a less experienced contractor. The “direction, supervision and control” test asks the following questions of a contractor’s working practices and the wording of the contract itself:

Direction: is the worker told how to do the job at hand?

Supervision: is the worker supervised while they carry out their work?

Control: does the engaging organisation have control over aspects of the worker’s working practices, such as their work schedule?

If the answer to any of these questions is “yes”, then there’s a chance that the contractor might be inside IR35.

The “substitution” test

The test of substitution considers whether the engaging organisation would be prepared to accept someone else to do the contractor’s work in the event of them being unavailable. If the engaging organisation would not be prepared to do this and would only accept the personal service of that particular contractor, it would suggest that a traditional employment relationship exists and that the contract could therefore be inside IR35.

The “mutuality of obligation” test

Mutuality of obligation (MOO) means that one party – the employer – is obliged to provide work and the other party – the employee – is obliged to accept it. Unlike employees, contractors have no obligation to accept work and unlike employers, the companies that contract them have no obligation to provide it. As MOO is a feature of an employment relationship, if it is present in a contract it suggests that the contract might be inside IR35. When assessing a contractor’s working practices and contract, there are certain factors that would indicate that MOO isn’t present and that an employment relationship, therefore, doesn’t exist. These include:

• the use of specific projects with set end dates

• the ability for either party to stop the work with very little notice

The ‘CEST’ checking tool

HMRC developed the Check Employment Status for Tax (CEST) tool to help contractors and the companies who engage them to check whether a contract and the contractor’s working practices fall inside or outside IR35. However, some questions were raised relating to the initial version of this tool and its exclusion of the mutuality of obligation test. An updated version of the CEST tool was released in November 2019.

Additional factors that might affect a contractor’s IR35 status

HMRC doesn’t just consider the outcome of the three employment tests when assessing a contractor’s IR35 status. It looks at a wide range of factors that might indicate that the contractor is “part and parcel of the organisation” and that a traditional employment relationship might, therefore, be in place. These factors include:

• the contractor having an email address at the engaging organisation

• the contractor having permission to use company equipment

• the contractor receiving the same company ‘perks’ as their employed colleagues

• the contractor being line managed in the same way as their employed colleagues

What are the consequences of being inside IR35?

Contractors who are inside IR35 and work through an intermediary in the private sector are currently required to declare this to HMRC. If the intermediary is a limited company, the company would add a deemed payment in the contractor’s salary and deduct tax and National Insurance accordingly. If the intermediary is a partnership, the partnership would work out the deemed payment and deduct tax and National Insurance in the same way. The partner would then report this amount on their individual Self Assessment tax return as if it were income from employment.

If a contractor fails to declare their IR35 status and HMRC challenges this in an investigation, the contractor may face a penalty. Penalties are levied as a percentage of the additional tax that the contractor is liable to pay and are determined by HMRC’s perception of the contractor’s intent and the degree to which they “failed to take reasonable care” to declare their IR35 status. If a contractor knows that they are inside IR35 but chooses not to take action, they are likely to be fined more than if they had simply made a mistake in failing to declare their IR35 status. In the public sector, the onus is on the engaging organisation to assess the IR35 status of its contractors. Anyone who the engaging organisation deems to be inside IR35 is usually brought on to the organisation’s payroll as an employee and is then taxed accordingly.

Whose responsibility is it to determine if a contractor is inside IR35?

IR35 was first introduced to all contractors in 2000. At first, it was the contractor’s responsibility to determine whether they were inside IR35 but in 2017, the government rolled out changes to IR35 rules in the public sector which put the onus on public authorities to decide whether their contractors are inside or outside IR35. In the private sector, it’s currently the contractor’s responsibility to determine if they are inside IR35. However, anticipated reforms to IR35 in the private sector mean that for large or medium-sized companies, the onus will soon be on the engaging organisation to make this assessment. It’s expected that the new rules – currently sitting in draft form in the Finance Bill 2019/2020 – will be introduced in April 2020.

Who will the new rules affect?

The new IR35 rules affect contractors who provide services to large or medium-sized companies in the private sector (defined in the draft legislation as having a turnover of more than £10.2 million and more than 50 staff) and who operate through an intermediary, such as a company or partnership.

What impact will the new rules have?

Once the new rules are introduced, if a large or medium-sized private sector company deems a contractor who is working through an intermediary to be inside IR35, the company will have a decision to make. It could either change the contractor’s working arrangements in such a way that the contractor is no longer inside IR35 or it could terminate the contract. If the company wants to continue engaging the services of the contractor, it could pay them through its payroll instead. In this scenario, the contractor would become an employee of the engaging company and would have to make the same tax and National Insurance contributions as other employees. When similar reforms were introduced to the public sector in 2017 The Register reported a “mass exodus” of IT contractors from the public sector, while other news sites claimed that IR35 had made it extremely hard for the public sector to hire for contract roles. However, a report commissioned by HMRC contradicts the news reports, claiming that the change was not substantial and that IR35 had not affected the public sector’s ability to fill contract vacancies.

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Off-payroll: What guidance is available?

Reforms to off-payroll working (IR35 tests) are coming to the private sector in April 2020. Lucy Webb investigates what guidance is available for accountants and contractors.

Despite the seismic changes that the off-payroll working reforms will bring to contracting in the private sector, HMRC has yet to release any comprehensive guidance on the draft legislation.

The general election should not, in theory, delay the passing of the Finance Bill 2019/20 containing the off-payroll rules for the private sector, so we still anticipating an April 2020 rollout.

In the following article, Lucy Webb examines six pieces of guidance from around the tax, business and contracting world and explains who the guides are tailored towards.

  1. HMRC’s guidance

HMRC’s offering leaves a lot to be desired. While further detailed guidance and an updated Check Employment Status for Tax (CEST) tool are promised to be released later in 2019, for now we have a policy paper, which links to other pieces of guidance available elsewhere on HMRC’s website.

The guidance is very light-touch at times. However, where more detailed information is provided (such as how to identify the size of a client) HMRC’s language is far from clear. When discussing the simplified test it says:

“You must apply the rules from the start of the tax year following the end of the filing period for the second financial year when you met the conditions.”

This may be decipherable to accountants, but other HMRC ‘customers’ could struggle to work out what period is which.Who this guide is for: practitioners who would like a broad overview of the upcoming changes and how CEST can be used to reach a Status Determination Statement (SDS).

IR35 guides for contractors

It is also important that the workers who contract through intermediaries understand what changes are underway. There are a few guides that focus on the contractor-led issues of the IR35 reforms, with some highlights being:

  • The Association of Independent Professionals and the Self Employed (IPSE)

IPSE’s ‘A Guide to IR35’ is a high-level, plain-speaking overview of the IR35 legislation. It provides a few concise examples of the hallmarks of IR35 such as substitution, control and mutuality of obligation, and briefly considers what happens if an engagement is deemed to fall within IR35.

However, IPSE’s guidance is notably light on the public and private sector reforms. On those aspects, it could do with an update as the information is only correct to May 2019, before the draft off-payroll legislation for the private sector was published.

IPSE was initially formed in opposition to the original IR35 proposals, and this stance becomes apparent at certain points in its guide, such as its view of HMRC’s CEST tool.

Who this guide is for: practitioners who want contractor clients to be up to speed with the basics of the IR35 legislation and understand when it may apply.

  • IT Contracting

While this guide is aimed at IT contractors, the information contained is useful for contractors working in other industries as well.

There’s a lot to like about this guide: it’s simple to understand, explains the basic principles of IR35 and also dives into the reforms in enough depth that a contractor should come away with a good understanding of what’s changing and how these changes may impact them.

It also covers questions that contractors are likely to ask eg do I have employment rights if deemed to be a disguised employee, what happens if I have contracts with multiple clients and how will I get paid.

Who this guide is for: contractors that want to understand IR35 in more depth but who don’t want to read the legislation.

Guides for payroll

The following guides have been designed with payroll professionals in mind. While they don’t offer all the answers, they serve as a useful point of reference when understanding how payroll and the IR35 rules will interact under the new regime.

  • CIPHR

CIPHR’s guide offers a solid overview of the private sector off-payroll working reforms from an HR and payroll perspective, with a clear outline of what the IR35 legislation is, why reforms are being introduced, and what changes to expect.

It seeks to answer a few questions more specific to the world of HR, such as: will hiring post-IR35 be a challenge? It also provides an action plan for both the pre-2020 and post-2020 period, with links for further reading.

However, there are some deficiencies to be aware of. For example, the guide comments that “Holiday, sickness absence, parental leave and employer taxes for workers deemed to be employees will be due”. This isn’t technically the case, as HMRC has said that workers that provide services through intermediaries are not entitled to employment rights, such as holiday pay.

Who this guide is for: despite the technical hiccups, this guide is a great resource for HR or payroll professionals who want to understand more about IR35 and how the private sector reforms may impact their day-to-day work.

  • AccountingWEB

Kate Upcraft’s article focuses on the practical payroll aspects of the IR35 reforms that haven’t been covered by HMRC’s guidance to date.

Acknowledging that there are HR, finance, and payroll challenges when dealing with a ‘deemed employee’ contractor, Kate highlights practical steps that payroll professionals should consider, including creating appropriate payroll records, applying the correct tax code, and how to pay deemed employees and PSCs.

Who this guide is for: payroll departments looking to further understand how to apply the new off-payroll working rules.

Lucy Webb

Tax Writer 

Lucy is an ACA and CTA qualified tax writer, who writes about the latest trends in tax and accounting, including IR35 and Making Tax Digital.

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Pay CGT on property in 30 days

From 6 April 2020, Capital Gains Tax due on the disposal of residential properties will be payable within 30 days of the completion date. This is another step in the acceleration of tax payment dates

The delay between making a capital gain and paying the CGT due can be as much as 22 months. For example, the CGT arising from a gain made by a UK resident individual on 6 April 2019 will be payable by 31 January 2021.   

NRCGT

In 2015, certain non-resident landlords were the first to be hit with an acceleration of tax payment period under the non-resident capital gains tax (NRCGT) rules. This tax was payable on gains arising from UK residential property, but only in respect of gains accruing from 6 April 2015 to 5 April 2019. Larger corporate landlords who paid the annual tax on enveloped dwellings (ATED) on their residential properties were liable to pay the ATED-related gains charge instead of NRCGT.

The transaction subject to NRCGT had to be reported within 30 days of the completion date, whether or not there was tax to pay. This short reporting period generated a lot of late filing penalties for taxpayers who weren’t advised of the change in the law, or in some cases were incorrectly advised by HMRC (Kirsopp TC07064).

The NRCGT was also payable within 30 days, but taxpayers who were already registered with HMRC for self assessment could defer that tax so it was payable with their normal SA tax.

New NRCGT

Finance Act 2019 transformed NRCGT so it now applies to gains arising from the disposal of any type of UK land or property which accrue from 5 April 2015 (residential property) or 5 April 2019 (non-residential property). This includes gains arising from indirect disposals of property such as where shares in a property-rich company are sold. Gains accruing from periods before April 2019 (or April 2015) stay out of the UK tax net if the landlord remains non-resident.

The NRCGT is also potentially payable by all non-resident landlords, as the ATED-related gains charge is abolished from 6 April 2019.

The NRCGT is charged at the normal rates of CGT for the taxpayer concerned, so corporates pay at 19% (corporation tax rate) and individuals, trustees and personal representatives pay at 18% or 28%. The tax is due within 30 days of the completion date for all transactions (with no deferrals), although as most properties have a base value at 5 April 2019, few gains will actually be subject to NRCGT in 2019/20.

UK landlords

In 2018, the government proposed that CGT would be payable “on account” within 30 days of the completion date for all UK residential properties disposed of by a UK resident. This change was due to come into effect on 6 April 2019 to coincide with the new NRCGT rules, but it was delayed until 6 April 2020.

The “on account” description of the tax payment is a misnomer as the full amount of CGT will be payable within 30 days, alongside a new online property disposal return. I suspect this return may look much like the existing real-time CGT report, except it will be possible for HMRC to enquire into the property disposal return independently of the taxpayer’s SA return.

If there is no gain to report or the gain is covered by exemptions or losses, the taxpayer won’t have to complete a property disposal return. It seems a lesson has been learned from the hundreds of late-filed NRCGT returns which reported little or no gain.  

If there is a taxable gain to report, the taxpayer must calculate the CGT due taking into account their annual exemption for the year and guess at the correct rate of CGT to apply (18% or 28% based on 2019/20 rates).

After the end of the tax year, the taxpayer will complete their self assessment tax return, including the property gain. Once their full income, gains and losses for the year are calculated, the true amount of CGT will be ascertained and any “on account” payment will be deducted. This could result in a repayment of CGT for the taxpayer. 

Action

Clients need to tell their tax advisors about their residential property sales as soon as they are agreed, so the tax due can be calculated and the property disposal return submitted to HMRC within 30 days of the completion date.

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VAT: Reverse charge for builders delayed until 2020

In a move hailed as a ‘victory for common sense’, the government has announced a 12-month delay to the introduction of the domestic reverse charge VAT for construction services, citing industry concerns and Brexit as the reasons behind the postponement.

Clock in the helmet

In a short briefing on gov.uk, the government announced it would be putting the introduction of the domestic reverse charge for construction services on ice for a period of 12 months until 1 October 2020.

The brief explained that industry representatives had “raised concerns” that many construction sector businesses were not ready to implement the changes on the original date of 1 October 2019. To help them prepare, and to avoid the new rules kicking in at the same time as the UK’s potential exit from the European Union, the reverse charge has been delayed for 12 months until 1 October 2020.

‘Construction chaos’ avoided?

Industry insiders, including the largest trade association in the UK’s construction sector, had called on the government to delay the changes, citing research findings that the charge could lead to a spike in company insolvencies and ‘construction chaos’.

In a statement, HMRC said that it “remains committed” to introducing the charge and in the intervening year it will focus additional resource on identifying and tackling existing perpetrators of VAT-related fraud in the industry. HMRC also committed to working closely with the sector to raise awareness and provide additional guidance to make sure all businesses will be ready for the new implementation date.

The tax authority recognised that some businesses will have already changed their invoices to meet the needs of the reverse charge and cannot easily change them back in time. Where genuine errors have occurred, HMRC has stated that it will take into account the late change in its implementation date.

“Some businesses may have opted for monthly VAT returns ahead of the 1 October 2019 implementation date, which they can reverse by using the appropriate stagger option on the HMRC website,” said the statement.

‘Victory for common sense’

Reacting to the news, Brian Berry, Chief Executive of the Federation of Master Builders, hailed the decision as “sensible and pragmatic”.

“To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms,” said Berry.