Autumn Statement October 2018
Recruitment Industry and Accounting Provider Soundbites
The below summary includes direct ‘lifts’ from the Chancellor’s Announcement (the blue boxes) for ease of reference. The My Digital Accounts Comment is an initial view and is subject to change following more detailed consideration and additional information such as Guidance Notes and Draft Legislation which will be published in due course
Personal Service Companies (PSCs)
1)Off Payroll Engagement in the Private Sector (‘IR35’) will be introduced in April 2020
The off-payroll working rules (IR35 reform) which were implemented in the public sector in 2017 will be extended to the private sector BUT will only apply to large and medium sized businesses from April 2020
A summary of responses to the consultation on Off-payroll working in the private sector has been published:
Clearly, many points raised have given the government and HMRC pause for thought and a further Consultation will be published, followed by legislation in Summer 2019.
My Digital Accounts Comment: There is clearly a nod to some of the issues identified in HMRC’s largely discredited CEST tool with enhancements to the tool now promised next year. The statement that the new rules will ”only apply to SMEs and large companies” presumably means the rules will only affect End Clients or Agencies with turnover exceeding £10.2m and over 50 employees? The anti-avoidance rules in this area will need to be carefully constructed.
This measure, when introduced, will be the biggest change in the taxation of the temporary labour market ever! Recruitment Agencies will not be comfortable taking the risk of paying a limited company ‘gross’ and End Users are unlikely to want to help with the assessment. Accountants with PSC clients in the temporary labour market would be well advised to consider setting up an Umbrella company
2) Employer’s National Insurance Allowance
The £3,000 employment allowance will be removed for larger employers (effectively those with over 50 employees).
My Digital Accounts Comment: Despite the Autumn statement in 2017, mentioning that “there is evidence that some employers are abusing the EA” (presumably a reference to the rise of micro-umbrella structures), there is no specific reference to targeting such structures in this Budget and the above reform does nothing to prevent this abuse. The Chancellor did not revisit his aborted statement from March 2017 regarding applying National Insurance on payments to self-employed workers. That said, there was a reference to the Taylor report, implying that consultation on this issue will continue.
3) Auto-Enrolment for the Self-Employed?
Following the successful introduction of auto-enrolment (though it remains to be seen what sandals in this area await future generations) and following one of the conclusions in the Taylor Report, it seems as though pensions for the self-employed will become mandatory in April 2020
My Digital Accounts Comment: This a predictable move but the mechanics of how it will operate need to be fleshed out. It would seem that “Engagers” (yet to be defined) will have to withhold an element of the payment to self-employed workers. It will be interesting to see the look on your plumber’s face when you deduct 5% from his bill for his “pension payment”
4)Reverse Charge for VAT in the Construction Industry
This has been widely consulted on and, as expected, will be introduced in October 2019. Effectively, the End Client will withhold VAT from the supply chain and pay it directly to HMRC on behalf of suppliers.
My Digital Accounts Comment:
Although widely predicted due to HMRC’s view of the prevalence of fraud in the construction supply chain, this will have a massive cashflow effect on those supplying construction workers. We can expect financial pressure in this sector and, perhaps, a spate of liquidations in the run up to Christmas 2019?
Other Points affecting Umbrella Companies and recruitment Agencies
5) Further erosion of the Corporate Veil
This Budget has brought an additional attack on the historic Victorian principle of limited liability. Going forward, the directors of businesses which fail may well be pursued personally for company debts when a company is declared insolvent.
My Digital Accounts Comment: There are many examples of where insolvency rules are abused and “phoenixing” is used to avoid, for example, HMRC debts but there are also many examples of where a companies fail for legitimate commercial reasons. This is an area where HMRC will be handed a weapon which could have far reaching and negative consequences for entrepreneurship.
6) VAT on Prepayments.
Traditionally, prepayments do not attract VAT but the implication here is that VAT will be charged where the payment is never
My Digital Accounts Comment:This is an intriguing paragraph which could relate to structures developed to frustrate fundamental tax principles – for example, the 2% limited cost trader rules for Flat Rate VAT, where “direct costs” are incurred but never paid for (hence a “VAT loss” is not incurred in a FRV registered company, but the company still meets the direct cost threshold).
7) Making Tax Digital (MTD) for VAT will be introduced in April 2019.
MTD is the ‘buzzphrase’ for an initiative to ensure that companies maintain their accounting records in real-time. Think of Payroll RTI for VAT and Corporation Tax! The idea is to ensure that a VAT return ties in to the underlying accounting records and remove the ability to ‘manipulate’ VAT returns outside of a software system. My Digital Accounts are participating in the HMRC MTD development programme and we can confirm that it is nothing to be afraid of!
My Digital Accounts Comment: We will hear a lot more about Making Tax Digital after Christmas as HMRC have a full-blown marketing campaign prepared. Any business above the VAT threshold, using bespoke or paper-based systems (including accountants) should begin considering whether their current arrangements, and software, are fit for the new MTD rule. So-called “Bridging Software” (not linked to underlying transactions will be allowed until April 2020.