Budget 2020: a guide for consultants and contractors

Rishi Sunak has just delivered his first budget. There were a number of measures that were good news for the wider business community, however as expected, The Treasury will be pressing ahead with IR35 reforms in April. Here’s what the March 2020 budget means to contractors and consultants.

Support for self-isolating contractors and consultants

A broad measure introduced by the Chancellor was support for those who need to self-isolate due to Coronavirus. For contractors and consultants, this means if you need to self-isolate you can pay yourself statutory sick pay (SSP), and then reclaim this SSP back from the Government. We don’t yet have the details, but it’s likely to be reclaimed via payroll from HMRC. It’s also unlikely this won’t be available if you’re inside IR35.

For those of you with broader business activities, emergency loans have been announced and banks have committed to being lenient with loan repayments and the extension of overdrafts. HMRC will extend their time to pay scheme, should your business be ‘viable’ yet face tax arrears.

Entrepreneur’s relief remains in place

Entrepreneur’s relief (ER) is available when you sell or close a business. It allows you to extract profits as a capital gain, and pay a reduced amount of tax on this gain. Many business owners accumulate value (and cash) in their companies over a long period and then extract this value when the close the company. Many see it as part of a pension pot.

In recent weeks, the Treasury has been testing the water with abolishing ER altogether. We’re pleased to hear that this is not the case. Instead, the lifetime limit of ER will be reduced from £10m to £1m – more than enough for most contractors and consultants.

If you are currently contemplating your options, it means there is no immediate rush to close down your limited company. Also, remember, if you do close your limited company and re-open a new company for contracting or consulting within a two-year window, you may have to repay the tax you save via ER. Our advice to clients is that if you know you’re definitely exiting the market, for good, then go ahead and close your company, otherwise it will pay to be patient.

IR35 reforms are going ahead

HMRC’s recent review gave us a strong indication that this was going to be the case. The Treasury will be implementing the off-payroll reforms in the private sector, as expected from April 2020. The main concession is a year-long “soft-landing” for clients where HMRC will be lenient on non-compliant organisations. HMRC have provided greater clarity on “reasonable care” when end clients determine the employment status of a worker (blanket assessments are now very risky).

We’re disappointed that The Treasury has not intervened to delay this reform. There is an on-going House of Lords enquiry during which professional bodies representing clients, agents, contractors and accountants have all called for a delay. inniAccounts has conducted and submitted research to this select committee showing the unplanned economic impact of the reform, and we’re delighted to say our research has been accepted as evidence. Overall, The Lords have taken a dim view of the Governments’ actions and whilst the Finance Bill that enacts this reform still needs to gain Royal Assent in the coming weeks, it’s unlikely to be stopped.

Large clients are struggling with the reform

We’ve seen first hand via our site www.offpayroll.org.uk that the private sector is struggling with the scale of this reform. In certain sectors (notably banking), PSC bans are rife. In many others, clients are attempting to assess the status of contractors, yet are finding the scale and complexity difficult, leading to blanket unfair determinations. Many of these organisations have made headlines in national newspapers due to projects at risk as a result.

But if we look beyond the largest engagers the picture is much fairer. Many smaller organisations with hundreds (rather than thousands) of contractors and consultants are delivering fair IR35 assessments. In many cases, they’re partnering with third-party assessors to deliver robust individual assessments. This picture, for example, is very evident in pharma: GSK came out early with a PSC ban, whilst AstraZeneca, Bayer, Pfizer, Roche and Vertex have all used the time to put in place robust, fair assessment processes.

Market forces will now take over

Our research shows that 3 in 10 contractors have now walked away from clients who have attempted to push them inside IR35 and 85% of project managers think that clients are unprepared for this degree of turnover. This is presenting a material risk to project delivery. This week we’ve seen two medium-sized clients make u-turns on blanket decisions and start assessing individually and fairly. In both cases, this was triggered by a large part of their delivery teams walking away. It’s becoming clearer to end clients the most cost-effective, and least-risk approach is to deliver fair IR35 assessments.

We’ve also recently visited a third-party IR35 assessor. They’ve had a significant uptick in enquiries in recent weeks – many of the clients they are dealing with were planning on addressing this post-April, but have now realised the urgency of the matter.

Our prediction: we expect in the coming weeks that many more medium-sized engagers will deliver fair IR35 assessments, either by getting it right first time or by making a u-turn after seeing projects impacted. For large engagers issuing blanket determinations, we expect to see lawyers employed by contractors challenging this position. For the largest engagers with PSC bans, we do not expect any movement in the short term. But we believe we will start to see an increase in contractor-lead litigation this year, driven by contractors who have been deemed employees for tax purposes (inside IR35), but not for employment rights. We are already aware of legal professionals preparing such cases.