London, 10 July 2015. In his 2015 budget the Chancellor is yet again taking a stab at limiting the benefits that come from working as a contractor. The flexible workforce of 1.7 million individuals will be taking home less of their hard-earned money. A reform of dividend taxation and proposals to remove tax relief for the cost of home-to-work commuting for those employed through an umbrella company and working under the supervision or control of any person will take a significant bite off earnings. Furthermore, these proposals will mostly hit the lower end of the market as it these contractors who count on these reliefs to make an assignment worthwhile.
The Government seems wholly unaware of the unique working activities and circumstances that differentiate contractors from permanent employees or traditional ‘temps’. Contractors have a genuine need to relocate often for assignment which may be short term and are rarely guaranteed. Removing the travel and subsistence reliefs would unfairly penalise this group. These new rules are expected to take effect from April 2016 following a consultation period but will not affect skilled professionals who maintain a high degree of autonomy during an assignment and do not operate under supervision, direction and control of the end user.
“The government is giving contractors time to make informed decisions about their contract of employment,” says Ian Temple, CEO of global recruiter Hydrogen Group. “Those contractors on overarching contracts of employment will need to decide whether it benefits them to terminate such arrangements before the changes come into effect next April.”
In addition, significant changes on how dividends are taxed are among the changes in this new “working people’s” budget (https://www.gov.uk/government/publications/summer-budget-2015). As a matter of course, most contractors receive a salary and dividends to top up any cash shortfall. With tax free dividends up to £5000 a year, people will not have the flexibility to decide on the mix that is right for their circumstances.
And if the change in dividend taxation wasn’t enough, the Chancellor has a triple whammy in store for one-person limited companies with the removal of the NIC Employment Allowance. Personal service company contractors who pay themselves any salary will no longer be entitled to claim the Employment Allowance despite having paid employers’ NIC. At present, any contractor operating a personal service company can offset the £2,000 allowance against employers’ NIC arising on ordinary salary.
Finally, the Chancellor confirmed that IR35 will, once again, be reviewed.
“The Government is looking at the IR35 with a view to overhaul a system that has been proven to be clanky and burdensome ” states Temple. “However the uncertainly of any new system is something contractors could do without.”
So, what does this mean for the contractor’ employment market?
“More contractors will look to incorporate instead of using an umbrella firm and some contractors will have to prove their “employment status” to remain unaffected by the proposed changes.” says Temple. “This of course will introduce uncertainty and hesitation when contracts are negotiated and new assignments evaluated between now and April.”
the Chancellor said: “…we will stop employment intermediaries exploiting the tax system to reduce their own costs by clamping down on the agencies and umbrella companies who abuse tax reliefs on travel and subsistence – while we protect those genuinely self-employed.”
Contractors, whose livelihoods depend on how the government goes about doing this, are holding their collective breaths.
About Hydrogen
Hydrogen is an award winning, London Stock Exchange listed, recruitment consultancy with a focus on mid to senior level opportunities. They operate globally with over 250 employees and offices across Australia, Asia Pacific and EMEA, with a research function spanning 40 countries ensuring relevant market intelligence and increased sourcing capabilities in talent scarce environments.
As a business, Hydrogen believes in building relationships with exceptional candidates that clients can’t find themselves; is structured around global practices combining international reach with local expertise and specialist knowledge; and delivers on their promises of always being professional, straightforward and positive.
For more information visit: www.hydrogengroup.com
