Chancellor said to be mulling over 5% increase to Corporation Tax
With the Autumn Budget approaching, it has been reported that the Chancellor is drawing up plans for a ‘£30bn tax raid’ that in some cases could see contractors and small business owners taxed at a rate higher than a PAYE employee.
Should Corporation Tax increase from 19 to 24% as speculated, it will see limited company contractors paying significantly more in tax (and in some cases more than employees) at a time when independent workers are not only dealing with COVID-19, but also readying themselves for the introduction of IR35 reform in the private sector next April.
Tax rises risk “collision course”
This is a move that, according to The Sunday Times, would generate £12bn for the Treasury next year and £17bn in 2023/24, but would “put the Government on a collision course with businesses hit by the pandemic.”
In response to criticism already aimed at the Chancellor, it has been said Rishi Sunak will argue that 24% is the global average tax rate for business – a figure that would still be lower than Germany, France, Spain and Italy.
Potential Corporation Tax increase unjust
It should be noted at this stage it’s not known if the Government is merely testing the waters to gauge the business reaction before rethinking things or if these changes will be rolled out.
Should the speculated Corporation Tax increase materialise, the impact it is likely to have on freelancers, contractors and small business owners cannot be underestimated. For example, if Corporation Tax was to rise to 24%, a contractor with a day-rate of £500 working outside IR35 and for 220 days a year would see their Corporation Tax bill increase by £3,342.
Historically, contractors have paid marginally less tax than employees earning an equivalent amount. This small gain helps to level out the fact that contractors have no job security, do not get paid for time off and do not receive any employment rights.
Following a controversial overhaul to dividend taxation in 2016, followed by further changes in 2018, the gap was reduced. If Corporation Tax rises by 5% (as reported), this may leave contractors and small business owners in a position where they pay more tax than a PAYE employee.
NIC, income tax and VAT uncertainty
Along with a Corporation Tax hike, Sunak is also reportedly considering pension reform and further changes to Capital Gains Tax.
Paul Johnson, director of the Institute for Fiscal Studies has also warned that National Insurance, income tax and VAT could also be raised in the “medium run”, “simply because that is where significant amounts of income come from.”
Chancellor promises against “horror show”
While these changes haven’t been confirmed and are by no means a certainty, The Treasury’s Steve Barclay refused to rule anything out when speaking to Times Radio. Since then, and after facing public outcry, Rishi Sunak said there will not be a “horror show of tax rises with no end in sight.”
Certainly, with contractors facing up to the reality of IR35 reform in the private sector, which will be introduced in April 2021, any prospect of significant tax increases at the same time is likely to concern independent professionals.
It’s also impossible to overlook the fact that around 710,000 limited company contractors fell between the cracks of the Government’s COVID-19 support, unable to count dividends towards the Coronavirus Job Retention Scheme due to “practical reasons”.
For the Government to announce a Corporation Tax increase in the upcoming Autumn Budget – when post-COVID-19 hiring data indicates businesses are prioritising contractors over employees – would be short-sighted and unjust.
But time will tell and as always, Qdos will keep you updated.
Qdos provides a range of leading IR35 solutions for contractors, recruitment agencies and hiring organisations that ensure for the successful and compliant implementation of changes to the off-payroll working rules.