What the Pre-Budget Report means for freelancers

No doubt tomorrow the newspapers will be full of the details of the pre budget report that the Chancellor delivered today. Probably the main issue will be the fact that Government borrowing has risen to £37 billion – even higher than most commentators were expecting. This point was the first that Oliver Letwin – the shadow Chancellor – made in his response. As he said, “if we are doing so well why is the chancellor borrowing so much”

However, in terms of issues that appear to affect freelancers’ businesses the following caught my attention: taxation of the personal income of business owners, Flat rate VAT; subscriptions to professional bodies; and childcare benefits;

Taxation of the personal income of business owners

Hidden away in chapter five of the Treasury’s report on 'Building a Fairer Society' is this announcement.

5.91 The Government has introduced a range of measures and targeted tax reductions to support small businesses; including through reform of capital gains tax, reducing the rate of corporation tax for small companies and the introduction of a zero rate, Stakeholders Pensions, and the abolition of advance corporation tax. These measures are encouraging the creation of more small companies, including through self-employed people incorporating their businesses. The Government is keen to ensure the measures it has introduced provide support for these firms taking the opportunities and responsibilities involved in that transition, and to encourage them to reinvest their profits and grow their businesses.

At the same time, the Government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals' tax liability; and that support should continue to be focused on growth.

The Government will therefore bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company and so protect the benefits of low tax rates for the majority of small businesses.

Many commentators on IR35 have said that measures like IR35 are dealing with symptoms rather than the underlying causes – such as the difference between the taxation of salary and the taxation of dividends. It is not clear from the above whether the Government is planning to deal with causes or is talking about more detailed measures that address the symptoms but not the causes. However it looks clear that next spring's budget will see more developments targeted at small owner managed businesses. We will have to hope that unlike IR35 they will at least undertake a proper programme of consultation first.

Flat rate VAT

An issue that we have highlighted before on UKTECH is flat rate VAT. When this was introduced a couple of years ago the rate for computer services was set at 14.5%. This is the rate applicable to the VAT inclusive turnover of the business. Hence for a computer services business whose turnover before VAT is £100,000 the flat rate VAT that the business would have to account for paid under the scheme was 14.5% of £117,500; that is £17037.50. This is only £462.50 less than the total output VAT charged at 17.5%. Hence for any computer services business to benefit from adopting flat VAT their input VAT would have to be less than £462.50 – otherwise they would pay less net VAT under the normal VAT regime. We have made representations to the Government before on this matter, stressing that if they truly want to reduce the burdens on small computer service businesses then they needed to make the applicable flat rate more realistic.

In the pre budget report it appears that there has been some recognition of this. The press releases report that the flat rates are being amended and the top rate under the flat rate arrangements will now be 13.5% - and possibly 12.5% for newly registered businesses. Although more details are not available we must assume that this will be the rate applicable for computer service businesses. This means that in the above example the amount due under the scheme would be 13.5% of £117,500; that is £15862.50. This means that if you have input tax of less than £1637.50 then the flat rate scheme would benefit you. This amount of input VAT equates to VATable input costs of a little over £9000.

Subscriptions to professional bodies

The Government has issued a discussion paper which looks at “the role that membership-based organisations play in developing workforce skills. If skills gaps are to be closed, and productivity increased, these organisations have an important role to play in making sure that more workers receive the training they need.”

It looks in particular at “how well the existing tax relief for professional fees and subscriptions contributes to this objective and invites comments on how it, or other alternative mechanisms, might do it better. “

The document notes that under the present rules for obtaining tax relief on subscriptions “Although it is open to any organisation to apply for approval under the existing legislation, the qualifying objects are written in terms of professional bodies, and the requirement that the organisation’s activities must be “solely or mainly” directed to those objects reinforces that perception. The “solely or mainly” test is a rigorous one that does not leave a great deal of scope for an organisation to undertake much in the way of non-qualifying activities.”

Hence one consequence is that “approved bodies are usually professional bodies. The existing relief is therefore concentrated on a limited part of the working population and does not provide an incentive across the workforce generally. Members of approved bodies currently receive tax relief for either the whole or the qualifying part of their annual subscription. Considered against the Government’s workforce development agenda, there is a case for considering ways of extending the scope of the relief to a wider range of organisations.”

They are therefore inviting comments about issues such as the criteria that might be used in establishing whether a particular body should be treated as a qualifying body, how a body’s investment in qualifying training activities can best be measured, and how tax relief might best be given.

Childcare

Currently employees are exempt from both tax and National Insurance when an employer provides a place in a nursery that they wholly or partially fund and manage (a "workplace nursery"). In the Pre budget report the Chancellor has announced that the tax and National Insurance exemption will be extended to the direct provision of childcare (employer-contracted childcare) and childcare vouchers subject to the following rules:

· The childcare used must be either registered childcare or approved home-childcare - this is in line with the Government's commitment to only support safe, good quality care.

· The exemptions will be limited to £50 a week to ensure that they are affordable and fairly targeted.

· To qualify for the exemption employers will have to ensure that where childcare schemes operate they are generally accessible to all staff.

The Government believes that this measure will, over time, increase the financial help available to 100,000 working families through employer childcare support schemes.

Allowances, child credits, National Insurance etc

The Chancellor also announced an increase of £180 per year in the child element of Child Tax Credit, to £1625 per child per year. The basic personal allowance for people aged under 65 will be increased in line with inflation to £4,745 for 2004-05. All other personal tax allowances, including the income limit for age related allowances, will increase in line with inflation.

The starting point for employers', employees' and self-employed National Insurance Contributions (NICs) in 2004-05 will increase in line with inflation to £91 per week. NICs are not paid on earnings or profits below this amount.

The upper earnings and profits limits for NICs will increase from April 2004 in line with inflation from £595 to £610 a week (£31,720 a year).

For the self-employed the rate of Class 2 contributions will be increased in line with inflation to £2.05 a week.