Solution for IR35 double-taxation, NI wins for sole traders but contractors largely overlooked
In the Autumn Statement today (Wednesday 22 November), it was revealed that the controversial ‘double-taxation’ of IR35 will be resolved.
A legislative fix means that, where IR35 status determinations have been incorrectly made by businesses, the PAYE liability issued to the fee-payer will now account for the taxes already paid by the contractor. As it stands, HMRC doesn’t offset these taxes, which sees businesses overtaxed.
There were also significant changes to National Insurance (NI) for the self-employed, abolishing Class 2 NI and cutting the rate of Class 4 NI. These changes are genuinely transformative, reducing the amount of tax these workers will pay.
We focus on the key changes impacting self-employed workers and the businesses engaging them:
The end of ‘double taxation’
Finally, a solution to a well-known problem where IR35 is concerned. Following a consultation earlier this year, HMRC has been trialling this solution anyway – but a legislative fix is welcome.
Essentially, where an ‘outside IR35’ status determination has been incorrectly made, HMRC looks to recover the PAYE liability from the fee-paying party. But in its calculations, the tax office doesn’t account for the taxes a contractor has already paid on the income they’ve received from that engagement.
This effectively meant that HMRC collected the same revenue twice. Solving this problem is a positive development, and should eliminate one of the concerns that end-clients have about engaging contractors.
Class reforms for National Insurance Contributions (NICs)
There were several changes announced where NICs are concerned.
Firstly, Class 2 NICs. Labelled “outdated and needlessly complex”
, the rate – set at £3.45 per week – is being abolished altogether, effective January 6. The Chancellor estimated the move would affect 2m self-employed workers, saving an average worker £192 per year.
Next up, Class 4 NICs. Currently charged at 9% on profits between £12,570 and £50,270, the rate will be cut to 8%, effective 6 April 2024.
In related news – relevant to temporary workers engaged on the payroll – the Class 1 NIC rate is being cut, from 12% to 10%.
Action on late payments?
The government hopes to “lead by example” on late payments by introducing “more stringent payment time requirements for firms bidding for large government contracts”.
Competing firms will have to demonstrate they pay their invoices within 55 days on average, tapering down to 30 days “in the coming years”.
Late payments are a serious problem for small businesses. Promises to solve this challenge are all well and good – but change may require more stringent measures than this.
Our take on the Autumn Budget
The move to solve double taxation is positive, but in reality, it was an open goal for the government, with the solution already trialled following a consultation this year.
Similarly, the changes to National Insurance – as significant as they are for sole traders – make little difference for contractors and freelancers who operate via their own limited company.
While the last 12 months have overseen some economic and political stability, with the government delivering on its promise to halve inflation, challenges remain for the self-employed, including a complex tax landscape and a high tax burden.
With a general election due to take place before the end of January 2025, today’s changes may have reignited some support for the government from the self-employed. For some, the focus will already be turning to the Spring Budget to see if the government has an ace up its sleeve.