George Osborne considering radical change to contractor tax

10 November 2015

The Chancellor. George Osborne, will deliver his Autumn Statement on 25th November 2015 and rumours have just been leaked that he is considering sweeping changes that will adversely affect UK contractors.

The Autumn Statement is in effect a mini budget.

Contractor One Month Rule

Over the weekend there were various reported leaks that The Chancellor is considering a new rule that would mean contractors who take a contract longer than one month would have to be paid PAYE by their end client after just one month. It is unclear if it would be from day 1 if it was known at the start that the contract would be for more than one month.

They are expected to listen to feedback from business regarding this 1 month rule and in particular from the CBI’s annual conference currently taking place.

The 1 month rule has received various shocked responses already and very little support.

Objections to the Rule include:

The change would result in contractors being subject to PAYE, Employees National Insurance and the client having to pay Employers National Insurance. This means the cost of employing contractors would increase. Contractors would be worse off and may no longer see it viable to be a contractor. Why be paid the same as an employee without the security? Projects could subsequently be suspended or fail to be launched.

The rule would capture almost all contractors and freelancers. Some often take contracts for periods up to and exceeding2 years. Current tax legislation still recognises that a temporary workplace can be one that is less than 2 years.

Some have suggested PAYE from the client should only be considered for longer term contracts i.e. over one year. They also point to the fact that contractors working through Umbrella Companies are already subject to PAYE and national Insurance so why not leave as is with Umbrella Companies collecting huge amounts of taxes on behalf of HMRC. Umbrella Companies are liked by end clients, contractors and recruitment agencies.

Contractors who work in Australia often change contracts before 6 months as they are often subject to a similar 6 month rule where their visa only allows 6 months with any one client.

It is not known if this change is proposed for April 2016, April 2017 or for a later date. However critics say that the Government wants to make changes sooner rather than later so that the voting contractors will hopefully have forgotten about them by the next election.

It is also unclear if there would be transitional rules allowing current roles and projects to be completed.

Contractors are also under fire from the Government with proposed negative changes regarding dividend tax, travel & subsistence expenses and entrepreneur’s relief.

There have also been discussions held about replacing the current IR35 legislation.

The above changes already penalise contractors and no further changes are required. Perhaps the leaked announcements are purely a method to make these seem more acceptable and not expected to take place in reality?

Material taxation changes as rumoured to be proposed should be subject to lobbying and discussion from all affected parties. If these were being considered why have other discussions been being held re IR35 and travel & subsistence?

Hopefully business will respond along these lines and the Chancellor will see that stopping contractors earning a fair net wage for the work they do will put projects at risk and hence the growth and stability of the economy.

Many contractor forums are already seeing posts along the lines that contractors will not be able to continue their current projects and that many are free to go abroad to work instead. A brain drain is not what the UK needs.

Miles Grady, Director of Umbrella.co.uk, adds “The Government seems to not be recognising the entrepreneurial spirit of contractors who are willing to take assignments around the UK, requiring excessive time and costs travelling, overnight stays away from family and friends and the lack of security from knowing their role is temporary and can in some cases be terminated without notice.

“Contractors deserve the right to have these expenses reimbursed tax free. If an employee was sent to work on a temporary assignment away from home then they would be reimbursed their expenses tax free. The Government’s attempt to bring contractors in line with employees is actually doing the opposite and punishing contractors.

“Contractors also deserve the right to operate their business through a limited company in the same way other professions and small businesses are entitled to.

“Overly stringent changes to tax have historically seen schemes derived including “offshore” where the government actually end up collecting less tax. Or worse still contractors stop working in the UK”.

Umbrella will be writing to The Chancellor to express these concerns. George Osborne is the MP for Wilmslow where Umbrella have their Head Office and currently employ 80 members of staff.