Budget 2020: how does it impact contractors?

The ‘Red Book’ confirms IR35 reform will be introduced on 6th April as planned

The Budget offered further confirmation that changes to the off-payroll working rules will be rolled out next month as expected, with the Government of the belief that “it is right to address the fundamental unfairness of the non-compliance with the existing rules.”

IR35 reform will be enforced.

The Chancellor recently reiterated plans to enforce IR35 changes in the private sector but the ‘Red Book’, released after Rishi Sunak had finished his first Budget speech, made it clear there is no turning back - not in the short-term anyway.

From 6th April, the responsibility for determining IR35 status will transfer from the contractor to medium or large business that engages them. As part of these changes, the IR35 liability will also shift from the contractor to the ‘fee-payer’ in the supply chain, which is the end-client or the agency placing the worker.

At the time of writing, the final legislation for IR35 has not yet been published, but the reform set to be introduced is expected to resemble the draft legislation, barring the ‘soft landing’ that the Government detailed in its IR35 response.

Page 88 of the Budget document ‘Delivering on our promises to the British People’ referenced IR35: “At Budget 2018 the Government announced that it would reform the off-payroll working rules in the private and third sectors from April 2020. The Government has recently concluded a review of the reform, and is making a number of changes to support its smooth and successful implementation. The Government believes it is right to address the fundamental unfairness of the non-compliance with the existing rules, and the reform will therefore be legislated in Finance Bill 2020 and implemented on 6 April 2020, as previously announced.”

Entrepreneur’s relief survives (just).

In his speech, the Chancellor said he had resisted pressure to scrap Entrepreneur’s Relief - a tax break enjoyed when disposing of a company. Instead, it will be reformed, with the lifetime allowance decreasing from £10m to £1m. The Government explained in the ‘Red Book’ that “this will help ensure that the tax system is fair and sustainable while leaving over 80% of those using the relief unaffected.”

For contractors who are planning to close their company as a direct result of IR35 reform, this will be welcome news assuming they do not exceed the lifetime allowance. But even so, this is a development that doesn’t detract from the fact that changes to the off-payroll working rules will be enforced.

National Insurance threshold increases.

The amount at which a contractor will pay National Insurance contributions will rise to £9,500 from April and is, according to the ‘Red Book’, “the first step in meeting the Government’s ambition to increase these thresholds to £12,500.” In the grand scheme of things, this is only a small concession to freelancers, contractors and self-employed workers - as is the freezing of Income Tax and VAT that was also announced in the Budget.

Corporation Tax stays at 19%.

Plans to cut Corporation Tax to 17% were shelved, meaning the tax contractors pay on their company profits will remain at 19%. The Government justified this by explaining that Corporation Tax is still the “lowest in the G20” which will ensure the “UK will continue to be an attractive place to do business.”

In Rishi Sunak’s first Budget, there were no George Osborne-style surprises and few Phillip Hammond-esque gags, as measures to protect the population and the economy from the Coronavirus crisis dominated proceedings. However, as our CEO, Seb Maley, explained in his reaction to the Chancellor’s speech, the threat of the virus should have given the Government even more reason to rethink the introduction of IR35 changes:

“IR35 reform is a needless, short-sighted tax grab from the Government. Given the alarming threat Coronavirus poses to the economy, this is not the time to introduce reform that has the potential to irreversibly damage the UK’s contractor workforce. But while these reforms are disruptive, complex and unfair, they can be managed. And the reality is they will be enforced in a matter of weeks. Businesses need to be prepared, pragmatic and ready to make well-informed IR35 decisions.”

With over 25 years’ experience, Qdos specialises in IR35 compliance. We conduct, on average, over 2000 IR35 status reviews every month and have handled more than 1,600 IR35 enquiries. As IR35 reform approaches, we are working with over 200 agencies and end-clients to help them manage these changes.