The Government has released its Draft Finance Bill, taking a step further in cementing changes proposed in this year’s Spring Statement.
We take a look at the measures which affect freelancers and small businesses.
IR35 to hit freelancers in private sector
The most controversial of the proposals is IR35, also known as ‘off-payroll’. This means that HMRC can tax sole traders if their role is akin to that of a full-time employee. In April 2017, these rules were implemented within the public sector and it looks as if they’re going to be brought in for the private sector from April 2020.
Freelancers are worried as if they’re classified as full-time employed they’ll be hit with PAYE while missing out on vital employment benefits such as sick pay and holiday entitlement.
The Federation of Small Businesses is calling on policymakers to delay implementation. It’s warning that it would be risky to bring in the changes following a sustained period of uncertainty, citing that it’ll cause ‘significant disruption’ to a quarter of a million sole traders.
FSB national chairman, Mike Cherry, labels this as a ‘reckless’ move:
“Left unamended, this bill could easily usher in an environment where firms in need of expertise in the short term steer clear of the self-employed community because they’re afraid of making an incorrect assessment. A lot of smaller firms that rely on sole traders have no experience of navigating IR35.”
He talks more about the impact that the implementation in the public sector has had:
“The Government will tell you that switching responsibility for off-payroll arrangements in the public sector has had a limited impact. It fails to acknowledge that the vast majority of businesses do not enjoy access to the beefed-up HR teams regularly found in public bodies,” he said.
“Large corporations have found the rules hard to navigate. And they’ll be reliant on a CEST tool which – by HMRC’s own admission – delivers an undetermined result in a big proportion of cases.”
Though there is room for the proposal to be scrapped, Seb Maley, CEO of Qdos, has doubts:
“With the arrival of the draft legislation, it seems very unlikely that there will be a U-turn or a delay at this stage.
“HMRC is wrongly under the impression that public sector reform has been a success. Therefore, it’s no surprise that private sector changes look like they will closely mirror those introduced in the public sector in 2017, barring a few small tweaks, such as the ‘status determination statement’, which means clients must respond to a contractor’s dispute in 45 days.
New insolvency rules could restrict access to finance
The Government is proposing that if a company goes bust, debt that is owed to HMRC like PAYE, employee NICs and VAT (but not tax penalties), must take priority over the debt held to floating charge holders and unsecured creditors.
As the proposal is retrospective, lenders may have to take out insurance on floating charge loans, checking every borrower’s books for unpaid taxes which could pose a risk to their capital. This price will likely be passed on to borrowers, resulting in an increase in cost and risk of lending.
R3 president Duncan Swift said: “The downsides of this policy are plain to see. More money back for HMRC after an insolvency means less money back for everyone else. This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs.
“The policy really doesn’t seem worth it. The Government is expecting a relatively small tax boost and seems prepared to accept damage to access to finance and increased costs in insolvency to get it. The wider costs of this policy will outweigh the benefits.”
These changes are expected to take effect from 6th April 2020.
First Making Tax Digital submission in August
The Government also made an announcement about Making Tax Digital.
HMRC is urging businesses to register before August in time for the first digital tax return on 7th August. It affects those with a turnover of £85,000 or more – or 1.2m UK businesses. If you’re paying by direct debit, make sure you register by the deadline on Friday 27th July.
Those who don’t want full MTD software can opt for bridging software.