Budget 2014 – Summary for Contractors

The Good News……..

The good news is that the typical contractor, who runs their own limited company or who operates through an umbrella company, undertaking “normal transactions” has been given no new measures to contend with as a result of the 2014 budget.  There were no new measures to strengthen IR35; the small companies profits’ rate will remain at 20% in 2015 and the VAT registration threshold will rise (as it usually does in April) to £81,000.

In fact, the typical contractor can rejoice with the rest of the nation about the favourable announcements made regarding savings and pensions, and for contractors thinking about property, there was further cause for applause as the Chancellor confirmed that the government has committed to investing another £6billion into the Help to Buy initiative.  Originally due to finish in 2016, the scheme will now run until 2020. The additional £6billion will be used in the equity loan part of the Help to Buy scheme, but will not be extended to the Mortgage Guarantee, which will still run for three years from January 2014 as originally intended.

 The “Not so good” news, but only for a limited few……

However, for some of Britain’s contractors, who have previously used tax avoidance schemes, the 2014 Budget could cause financial ruin……

The “pay-up first” tax avoidance rule mentioned in the Autumn 2013 statement is confirmed to be going ahead

What happened to “Innocent until proven guilty”?

Contractors who are already under investigation or in receipt of a notice of assessment from HMRC, or who have used a tax avoidance scheme that is registered, or countered by the GAAR for tax avoidance, will be forced to pay the amount of disputed tax before the case is resolved and without exception there will be no rights of appeal.

Some may feel that the new “pay now and we’ll talk about it later” approach will, for some contractors, be their just deserts but others, including those who are victims of HMRC errors and arguably those contractors who have used legal tax avoidance mechanisms in good faith, and followed HMRC guidance by notifying the department that they used them under DOTAS (Disclosure of Tax Avoidance Schemes), may feel that HMRC are moving the goalposts retrospectively.

The DOTAS regime has been in place for several years.  It allows HMRC to keep up to date with the types of tax avoidance schemes in circulation, giving the opportunity to review and if necessary, amend legislation to block any scheme which the government considers aggressive and unfair.

Under DOTAS, a scheme promoter is required to disclose the main elements of the scheme to HMRC.  The scheme is then given a DOTAS number and any future users of that scheme are required to disclose the fact that they are using that scheme by entering that number on their tax return. 

By disclosing the fact that a legal tax avoidance scheme is being used, the contractor is demonstrating their intention to be transparent with HMRC, consequently, these new powers enabling HMRC to demand payment without fair trial has met with much disapproval.  Many feel that any change in legislation regarding legal tax avoidance schemes should take place first and then tax paid accordingly from that date forward rather than HMRC being given the power to use the DOTAS regime to collect tax retrospectively.   The regime was understood to be an information tool for HMRC not one with which to catch people out. 

 And as if that wasn’t bad enough…….

New recovery powers for HMRC mean that they can recover disputed tax amounts from the investments held by the contractor

To go hand in hand with HMRC’s new powers to demand “payment first” on disputed tax amounts as explained above, they are also to be given enhanced recovery powers to allow them to recover debts from investments held by any contractor owing more than £1000.  A minimum aggregate balance of £5000 must be left across all accounts but other than that HMRC can take what they need in order to satisfy the debt. 

Again, many may feel that it is only fair that everyone pays what they owe but this will invariably include those on low incomes who have just fallen behind with their tax payments as a result of quieter periods of business.  It will also include those mentioned above who have followed HMRC guidelines and behaved with complete transparency regarding their tax avoidance by using the DOTAS regime.

In Summary…

On the whole, the 2014 budget can be viewed positively by the majority of Britain’s contractors.  Chancellor George Osborne referred to it as “a budget for the makers, the doers and the savers” and let’s face it, it’s about time we had one of those!  Let’s hope that the “Pay-up first” avoidance rule will punish those for whom it is really intended and the innocent casualties are few.