TAX relief for contractors in the pre-budget report
In addition to the Chancellor announcing that the standard rate of *VAT will be reduced to 15% on 1 December 2008, there has also been a reprieve for contractors.
*(This means that for any sales of standard-rated goods or services that take place on or after 1 December 2008 providers should charge VAT at the new rate of 15%. Only standard-rated sales are affected. There are no changes to sales that are zero-rated or reduced-rated for VAT. Similarly, there are no changes to the VAT exemptions. The 15% rate will remain until 31st December 2009, and from 1 January 2010 it will revert to 17.5%.).
Concern over the scale of the recession Britain faces has saved IT contractors from the potential fate of imminent tax rises in yesterday’s Pre-Budget Report of £500million.
Turning down a £300m tax-raising opportunity to legislate against umbrella companies, Alistair Darling said the rules governing their expenses would “remain unchanged.”
Announcing more contractors’ relief, albeit definitively short-term, the Chancellor said legislation to enact *‘income-shifting’ proposals, due to net £200m, would be delayed.
Delays to the *income-shifting proposals also include the proposed ‘clampdown’ on husband and wife companies that split income generated from their businesses to reduce their joint tax bills by using their personal allowances. The Government has now advised that the policy is “under review”.
Francesca Lagerberg(partner at Grant Thornton) commented: “thank goodness this has been kicked into the long grass. This is a common sense approach in a difficult market. But, what owner managers would like to hear is that it will never come back”.
*(The treasury said “The Government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax”)
To pay for a ‘fiscal stimulus’ of £20bn, he said Mr Darling could not raise it from contractors, so he had to offer “across the board” relief likely to show up in the macro economy.
To this end, the Chancellor said he would slash VAT on goods and services to 15% from 17.5% from next Monday until the start of 2010, when it will return to its current level.
The VAT cut, which is the equivalent of handing consumers £12.5bn, will fund the injection, alongside an increase in the income tax take from 40% to 45% for the highest earners.
The package will also be funded by massively increased state borrowing - £78bn in the current financial year, then rising to £118bn in 2009/2010, or 48% of GDP, before peaking at 57% of GDP in 2013/2014. The budget will not be balanced until 2016.
Yet like the newly proposed hike to National Insurance (by 0.5%) for workers and employers, the new band for top earners will not start until 2011, a year after the next general election.
The pre-budget report also includes giving hard-up firms extra time to pay tax bills; a £1bn temporary funding scheme offering loans upwards of £1,000, plus £4bn in European-backed loans.
Part of this offering of “real support, quickly,” for all firms means the rate of corporation tax will no longer rise to 22%, as proposed by Gordon Brown in 2006, but will stay at 21%.
Reflecting on the move, the Professional Contractors Group, the trade group for freelancers, said its members gave a lukewarm response to hearing that the biggest corporation tax take was still incoming.
John Brazier, its managing director, said: “The decision to delay the third of the successive rate increases instituted by Gordon Brown’s last Budget is barely a concession at all.
“Small business owners will not be fooled – the government should have completely reversed this policy, which was a mistake to begin with.”
The PCG also questioned the benefits of cutting VAT by 2.5%, a move business fears will cause administrative burdens, lost savings for wrong decisions and mistakes on returns.
To reflect the rate drop, starting December 1st, contractors must amend their invoices, change the settings on their accounting software or ask their provider to if they cannot set the rate themselves.
Contractors with queries should read new HMRC guidance, of which Appendix E states that IT consultancy or data processing workers on the Flat Rate Scheme charge VAT at 11.5%.
Whilst some may be celebrating the Tax breaks that the PBR has brought with it, Shadow chancellor George Osborne, for the Conservatives, accused Mr Darling of “bringing this country to the verge of bankruptcy” by doubling the national debt, which is set to reach £118bn next year. Mr Osborne accused the government of creating “a huge unexploded tax bombshell timed to go off at the time of the next economic recovery”. He said Mr Darling had offered “temporary tax giveaways paid for by a lifetime of tax rises on the British people” and he said the country’s future had been “mortgaged to bail out the mistakes of the past”.
Lib Dem treasury spokesman Vince Cable said VAT cuts would not be enough to boost consumer spending and “it would be much more sensible to put money directly in the pockets of low paid workers by cutting their income tax”.
But Mr Darling’s pledge to help “all types of small business” through the recession, now due to last for the first two successive quarters of 2009, partly explains why contractors emerged unscathed.
“To have done the two things which were on the agenda – which was travel rules for umbrella companies and income-shifting, would not have fitted with the rest of the PBR,” argued Anne Redston, visiting professor of tax law at London’s Kings College.
“They have not said they are not going to do either of these, but they have put them on the backburner. For at least another year I would say contractors can go on in the way they did before.”
Most contractors might welcome the PBR but should realise that measures for umbrella and jointly-owned companies are still “waiting in the wings…not thrown away and the probability is that they will reappear.”
The above article includes content from :-
www.contractoruk.com
The Daily Telegraph
www.hrmc.gov.uk
Tags: alastair darling, contractor, income shifting, pre budget report, tax, vat 15%, vat reduction
