What Can Contractors Expect from the March Budget 2021?

15th January, 2021
By 15. January 2021News
Mini Budget announces U Turn on IR35

Chancellor Rishi Sunak will deliver the first Budget of the year on March 3rd. Given the fragile state of the economy, and the fact that the pandemic is far from over, there’s been some speculation that it might be delayed yet again. However, there’s growing belief that while the March Budget may take a different form than usual, it’s unlikely to be postponed.

There are several pressing issues that need to be addressed, making the budget a likely necessity. Chief among these is the huge financial deficit in public funds. Having spent nearly £400bn on coronavirus support measures, the Chancellor must now to turn his attention to the question of balancing the books. The economic impact of the pandemic means that the government needs an actionable plan of repayment and recovery.

HMT’s initial announcement of the March Budget framed it as an opportunity for the government to set out the next phase of the plan to tackle coronavirus. The fact that there’s no explicit mention of tax policy has left some wondering what form this plan will take. With so much hanging in the balance right now, there are many who feel that it’s the wrong time to introduce a raft of new tax measures. However, it’s difficult to see how else the growing spending deficit can be made up.

Now, more than ever, there’s an urgent need to implement impending tax changes that will increase revenue for HMT. As has been the case on previous occasions, the Treasury could use this angle to justify some of their more unpopular tax legislation. HMT are likely to point out, for example, the need for urgent NHS funding.

Where contractors are concerned, the incoming IR35 reforms scheduled for April could be top of the government’s hit list. Last November, the Spending Review 2020 contained the calculation that delaying the IR35 reforms by one year has cost the government £740m. The Chancellor has held firm on the need to address disparities when it comes to how limited company contractors pay tax. Despite receiving criticism for the lack of coronavirus support for contractors, Sunak hasn’t budged an inch, so far ignoring calls to implement the Directors’ Income Support Scheme. Many have linked the Chancellor’s notable lack of support for limited company directors and the impending IR35 reforms.

While campaigners against off-payroll reform are still actively petitioning, it’s difficult to see what an alternative scenario would look like. Despite the IR35 legislation’s numerous and well documented flaws, no attempt has ever been made by the government to conceive a viable replacement. If there was no inclination to draw up new legislation before the pandemic hit, which would require a significant overhaul of the tax system, it seems even less likely now.

Dealing with the continuing impact of coronavirus and the finer details of the Brexit deal will be the focus of the government’s attention, both now and for the foreseeable future. While there are those who would advocate another postponement of the IR35 reforms, without a plan for the future, it would serve little purpose other than to delay the inevitable.

While some businesses have taken the default option of no longer engaging contractors in order to eliminate the risk of making incorrect IR35 determinations, many have not. With around ten weeks to go, most business who engage contractors have had to begin costly IR35 assessments that demonstrate “reasonable care” has been taken. Contractors have also had to make hard decisions, with many closing down their limited companies in preparation for reform.

A record number of UK company directors closed solvent businesses in the three months to September. Data from The Gazette, the UK’s official public record, showed that 3,126 businesses had voluntarily appointed liquidators in the third quarter of 2020 – up by more than half (52%) in the same period in 2019. This follows the pattern of increasing limited company liquidations when the government introduced IR35 reform to the public sector in 2017. But the IR35 reforms aren’t the only reason for the recent surge in business closures.

There’s been speculation that Capital Gains Tax (CGT) will be increased to a maximum rate of 40% as the Chancellor looks to boost public finances. An Office of Tax Simplification review commissioned by Sunak recommended that the government should consider aligning the CGT rate more closely with income tax rates. In general, CGT is currently charged on gains at 10 per cent for basic rate taxpayers and 20 per cent for higher rate taxpayers. Income tax is charged at a basic rate of 20 per cent, rising to around 40 per cent at the higher rate. The review also suggested the government think about taxing earnings retained in companies by owner-managers as income.

The recommendations on CGT would see a surge in the number of people liable to pay this tax, which could raise around £14bn for the Treasury. As part of its package of suggested reforms, the OTS has also advised scrapping the Business Asset Disposal relief, which used to be known as Entrepreneur’s Relief. This tax relief fixes CGT at 10 percent when a business owner is disposing of or selling their company. This increases the incentive for business owners concerned about CGT, IR35 reform and the economic outlook to seek voluntary liquidation and cash out while they can.

If the impending Budget brings confirmation of the above, the combined impact could hit the contracting sector hard. 2020 was a difficult year for contractors, who mostly fell through the gaps of the coronavirus support schemes and have had to rely on personal savings to see them through. As the pandemic drags on, and with Brexit adding to the disrupted business landscape, it’s difficult to see how those left without support can carry on indefinitely. Ultimately, the Chancellor will have to balance the UK’s need for revenue with its need for a viable flexible workforce. This leaves the question: In a climate where permanency is becoming increasingly redundant, is pushing the contracting sector to breaking point a move the Chancellor can really afford to make?

For more on the latest economic outlook and hiring news, you can read our article here. If you’re starting a new contract, ContractingWISE has access to a wide range of hassle-free services that can help you with setting up a limited company or finding the right umbrella company for you. To talk to a member of our team, call: 0203 642 8679

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