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Self-employment and contracting - new tax measures

Self employed people and small business owners have been impacted by a series of new tax measures in recent months.

As implementation has been patchy it may be time for the Government to take stock and ensure the planned measures work in practice before further changing the system.

Philip Hammond's announcement that budget announced NIC changes for the self-employed would be reversed highlights the attraction to policymakers looking for sources of revenue of increasing taxation on the growing population of self-employed workers, 'gig economy' workers and owner-managed businesses. The Institute of Fiscal Studies reports that:

"The self-employed pay lower National Insurance contributions than employees. This amounts to £1,240 per self-employed person per year. In principle, lower access to social security benefits may justify some tax reduction, but in practice, the differences in benefit entitlements are small."
Source: Green Budget 2017, Chapter 7 Tax, legal form and the gig economy

This measure has (on the same day as publishing a detailed justification of the economic case for it) been abandoned but a number of other new tax measures continue to place an increased financial and administrative burden on the self-employed and contractors.

Off-payroll working in the public sector
From 6th April, contractors working in the public sector through their own companies will no longer be responsible for agreeing their tax status (whether they are treated for tax purposes as employees and so subject to income tax and national insurance contributions) with HMRC.

Some examples of the difficulties with this legislation are set out in our article on Off-Payroll Working in the Public Sector.

Unlike the abandoned tax increase for the self-employed, IR35 and the new off-payroll working rules tackle both employer and employee national insurance contributions, which on the one hand means a greater potential tax take for HMRC but on the other hand means much of the cost of changes will be borne by the public sector.

Making tax digital
A further IT-dependent project is quarterly reporting of income for the self-employed via mandatory online software, due to come in from 2018. The government estimate the additional administrative set-up cost of this in the first year to the average self-employed person will be £280. Evidence given in the Lords enquiry points to it being far higher in some cases.

In the long-run the Making Tax Digital project may help small businesses keep compliant and remember to charge all their expenses in their returns. But the early stage costs, and concerns about the ability of HMRC to manage the set up of another major IT project in a timely manner, are leading to widespread calls for an extension of time for implementation or higher thresholds for mandatory digital reporting, at least at first.

DWF has previously reported (tax changes for owner managed businesses and contractors) on the range of further changes being considered by Whitehall for small businesses – many will feel a pause and consolidation is now sensible.

 

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Samuel Dooley

Associate

I advise and train on tax issues, specialising in real estate and M&A transactions.

Caroline Colliston

Director

I am an experienced commercial tax solicitor and chartered tax adviser.

Jon Keeble

Partner

I am a Partner in the Employment team with a particular specialism in working with organisations in the retail, education and affordable housing sectors.

Jon Stevens

Partner

I am a Partner and specialist tax lawyer with experience of advising on all aspects of tax planning related to corporate and property transactions.

Helga Breen

Partner - Head of Employment (London)

I am a Partner and head of the Employment team in London.