Today, the first Budget in 18 months was announced. This was the UK’s first Budget as a non-EU state in over four decades, delivered by Rishi Sunak who has held his position as Chancellor for just 4 weeks. With that in mind, and with the outbreak of coronavirus and subsequent impact on the economy, there has been speculation about what the Budget would look like.
For contractors, there has been much anticipation about what the 2020 Budget will mean for them – amidst a climate of IR35 and off-payroll reforms and the outbreak of COVID-19 which could have damaging affects for self-employed workers.
So, how does the 2020 Budget measure up? In this article, Umbrella Broker outlines 5 things every contractor needs to know about the 2020 budget.
1. No mention of changes to off-payroll rules in the private sector
IR35 has been a contentious topic for contractors throughout 2019 and has faced much criticism and anticipation, with thousands predicted to be badly damaged by the reforms.
Changes to the legislation are set to come into effect from 6th April, the start of the 2020/21 tax year, and will impact contractors operating through a limited company – with an estimated 170,000 individuals and 60,000 organisations being effected.
Under the reforms, it will now be the responsibility of the end-client to assess a contractor’s IR35 status, with the aim of removing tax advantages to so called ‘disguised employees’ – those who work more like traditional employees rather than contractors.
Under the new rules, fee-payers, usually a recruitment agency or client, will be responsible for deducting income tax and National Insurance contributions from the contractor. The Treasury expect this measure to net £1.3 billion each year by 2023.
Although the client is obliged to take reasonable care when carrying out their assessment, it is predicted that many larger clients will simply opt not to use personal service company contractors, those that operate under limited companies, at all.
For many off-payroll contractors in the private sector this will bring huge changes. It could mean that operating through an umbrella company becomes the best payroll option as operating under a limited company simply becomes an unfeasible option.
For the thousands of contractors that will be impacted by IR35, perhaps the biggest shock of the 2020 Budget announcements is that there was not a single mention of any changes to IR35 by the Chancellor. This was a big blow to the thousands of contactors that stand to be damaged by the off-payroll reforms from next month.
2. Reforms to Entrepreneur’s Relief
Entrepreneur’s Relief offers relief to those who wish to close or sell their business, reducing the Capital Gains Tax rate from 20% to 10% for those who qualify. Initially introduced in 2008, Entrepreneur’s Relief has since been criticised – with the lifetime limit of the use of Entrepreneur’s Relief having risen from £1 million to £10 million over the past decade, there are claims that it only benefits the rich rather than genuine entrepreneurs.
Amongst rumours that the previous Chancellor, Sajid Javid, planned to curb the tax break in his Budget, Rishi Sunak faced pressures to scrap the Relief altogether.
So, why is this important for contractors? It’s relevant because with IR35 reforms that are set to roll out in April, thousands of contractors may be forced to close their limited companies in light of the changes to off-payroll regulations.
Entrepreneur’s Relief in its existing form offered a tax efficient way of extracting remaining funds out of a limited company that is being closed.
Today, the Chancellor has announced that rather than abolish the Relief, he is instead reforming it – reducing the life-time limited from 10 million to 1 million. This means that 80% of small business owners will be unaffected by these changes. This is good news for the majority of contractors who can still take advantage of this tax efficient way of winding down a business.
3. No end to Fuel Duty Freeze
With rumours of a possible end to the Fuel Duty Freeze being rife, this would have impacted any contractors required to travel for work.
Supporters of Fuel Duty argue that the tax encourages uptake of electric vehicles which are widely considered better for the environment. On the other hand, opponents of the tax argue that higher fuel costs will hike up prices of almost everything else, from food to clothing.
With the conservatives party being divided on the issue of Fuel Tax, it was unknown whether such changes would be implemented in the 2020 Budget.
However, it was today announced that there would be no end to the Fuel Duty Freeze. That’s good news for any contractors that are required to travel for work who will remain unaffected.
4. Sick pay for the self-employed impacted by coronavirus
Perhaps the most significant change announced in the 2020 Budget was that the government will pump in £7bn to supporting the self-employed, businesses and vulnerable people affected by the global outbreak of the coronavirus.
There are thousands of contractors operating through a limited company who do not receive statutory sick pay, meaning if they were unable to work due to being taken ill by the spread of coronavirus, their income would be badly affected.
However, the great news for contractors is that Rishi Sunak has announced that for those workers who don’t receive sick pay, it will now be easier to receive benefits to ensure the time spent off work due to illness is covered for. What’s more, workers can claim these from day 1, rather than day 8. The Chancellor also temporarily removed the minimum income level from universal credit.
5. Temporary deferred Tax Payments for the self-employed
The Chancellor also announced that the self-employed will be able to temporarily defer tax-payments over an agreed period of time. This is more good news for any contractors who may be impacted by coronavirus and unable to work due to illness, removing pressures of keeping up with tax payments during that time.
Is it time to move to an umbrella company?
Although there’s lots for contractors to celebrate in the 2020 Spring Budget, there are also some blows, such as the omission of any mention of IR35. The reality is that thousands of contractors will be impacted by this, for whom the best option may be operating under an umbrella company rather than carrying on working through their limited companies.
