Hammond plans to toughen self employed tax rules in Budget

Philip Hammond

Chancellor Philip Hammond is this week expected to announce plans to raise billions of pounds from Britain’s army of self-employed workers and contractors.

Hammond will unveil his Budget on Wednesday amid a gloomy outlook for the economy and the public finances. In a speech that economists said would be cautious, the Chancellor is likely to tighten the tax rules under which freelance workers are paid.

Treasury officials are thought to be considering two major proposals. One involves a plan to extend ‘off-payroll working’ rules which would force big companies to deduct tax and National Insurance Contributions automatically from the gross pay of self-employed workers who work through personal companies.

The rules, which came into effect for the public sector in April this year, could be extended to all private sector businesses.

Lee Hamilton, a partner at accountant Blick Rothenberg, said there was ‘mounting pressure’ on the Government to apply the rules to the private sector to make the system more fair and to address fears that tax is being lost because contractors are not adhering to the rules. ‘A change is coming,’ he said.

The Treasury estimates that the public sector off-payroll moves will raise £800million over five years. The private sector change could raise twice as much, experts said.

A second proposal relates to existing Treasury plans to lower the threshold at which small businesses have to register and pay VAT.

The threshold could be brought down from a taxable turnover of £85,000 to as little as £26,000. A reduction of that magnitude would raise £2 billion a year.

Entrepreneurs’ Relief is also under threat. Commenting abut the suggested changes Steven Tebbutt, Tax Director, MHA MacIntyre Hudson said: “There’s a growing expectation that Entrepreneurs’ Relief will be attacked as part of the Autumn Budget, which will prove an unpopular move with business owners and aspiring entrepreneurs. Such a change might appeal however to younger generations who feel that wealthy business owners shouldn’t benefit from such a generous tax saving measure.

“The Government has already introduced “anti-phoenixing” rules to combat business owners abusing the relief by extracting profits through liquidation, only to resume the same business, sometimes multiple times or even ad infinitum. However, there remains a number of planning opportunities which the Government could still look to limit or close.

“For example, it would be relatively simple for the Government to amend the legislation so that qualifying conditions have to be met for, say, five years, rather than the current one year which generally applies. This would immediately make it more difficult to structure disposals in advance of a sale to secure Entrepreneurs’ Relief, as business owners looking to sell would have far less opportunity for eleventh hour planning. Such a change would help ensure that only business owners meeting the conditions over a substantial period qualify for relief.

“The Government might also look to increase the personal shareholding requirement – currently a shareholder must hold 5 per cent or more of a company to qualify for relief on the sale of those shares. The Government may feel this relatively low shareholding requirement is hitting their coffers too hard.
“HM Revenue & Customs have long held the view that if more than 80 per cent of a company or group’s activities are trading it will be accepted as a “trading” for Entrepreneurs’ Relief purposes. However, 80% is not a legislated limit and the question of how to test the 80 per cent is a common one. The Government may look to legislate further here; perhaps setting a threshold in excess of 80 per cent, to limit the availability of the relief.

“Business owners, particularly those expecting to liquidate or sell all or part of their business soon, are advised to urgently review their existing arrangements. Individuals that have invested, and were expecting to make use of the relief upon future disposal, will also have a keen interest in developments in this area.”