The ‘official agreement’  between the Conservatives and Lib Dems, published earlier this month, hinted at a number of business and personal tax policies, due to be confirmed in the Emergency Budget taking place on 22^nd June. Our contractors are a savvy bunch, and on the whole, appreciate that the UK needs to address its massive budget deficit and this will involve more taxes; however, fairness and clarity will be key.

Now that I’ve had a chance to digest the content of the agreement there are a number of aspects that contractor’s should be keeping an eye on.

Corporation Tax

The agreement says that the coalition Government “will reform the tax system by simplifying reliefs and allowance, and tackling avoidance, in order to reduce headline rates. Our aim is to create the most competitive corporate tax regime in the G20, while protecting manufacturing industries.”

This has been the main focus of the media debate this week and is potentially good news for contractors who may pay less tax as a result. The caveat to this is that, as part of the Government’s moves to clamp down on avoidance, some of the current allowanced might be removed. This could mean that although the headline rate may go down, the actual amount you have to pay may go up.

National Insurance

The new Government has pledged to “protect jobs by stopping the proposed jobs tax.” This will be welcomed by employers as it reduces their staff costs. It will see increases in NI contributions of one per cent though.

The good news for limited company contractors is that there is no NI paid on dividends so it won’t impact on their earnings from their Ltd company.

Capital Gains Tax

The Government has stated that it will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, although there will be generous allowances made for ‘entrepreneurial’ business activities.

Again, no detail here yet and no indication as to what constitutes entrepreneurial activities but the key thing for Ltd company contractors is the potential impact this could have on things such as rental properties owned by their Ltd company. If so, then this may negate the gains contractors can make from investing profit in assets such as this.

Income Tax Personal Allowances

The focus of the Government’s income tax policies looks to be reducing the tax burden for low to middle income earners. This will be welcomed by most people but there is a sting in the tail. The wording of the ‘agreement’ would suggest that from 2011/12, a withdrawal of personal tax allowance for those on incomes between £100,000 and £120,000 is highly likely.

Tax avoidance

The Government will be making every effort to tackle tax avoidance and although the detail hasn’t been provided yet, offshore schemes such as EBTs will be coming under close scrutiny. Something that contractors working in this way will be keeping a very nervous eye on.

IR35

Finally our old ‘friend’ IR35, a topic that has risen its ugly head quite a lot before, during and in the weeks immediately after the election.

The agreement states: “We will review IR35 and seek to replace it with simpler measures that prevent tax avoidance but do not place undue administrative burdens or restrictions on the self-employed or restrict labour market flexibility.

As I said earlier, contractors are a savvy bunch and I don’t believe anyone expected IR35 to be abolished completely, certainly not in today’s economic climate. What contractors do ask for though is certainty about if and when they face a tax bill and for how much. If the legislation was clear and could provide a series of specific tests that then produce a balanced answer, then taxpayers, advisors and HMRC would save a lot of time, admin and expense.

I’ll keep updating this blog as any new developments come up in the run up to 22^nd June and will be posting the ClearSky reaction to the budget here as well. In the meantime, feel free to leave any thoughts or comments of your own.

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Tags: ClearSky, contractor, corporation tax, HMRC, IR35, uk government, uk tax