Budget 2003: the impact for freelancers

The Chancellor rose at 12.30 to present his first pre-lunch Budget speech. Whether the timing had any impact on its length is hard to know but he sat down again at almost exactly 1.30pm – just about leaving himself time for a quick lunch!

As he noted when he opened the speech this was the first time in over 50 years that a Chancellor presented a Budget while the country was engaged in a major military conflict, the last being in 1951 during the Korean war.

When he sat down an hour later I couldn’t help feeling that the events in Baghdad appeared to be rather more momentous than this Budget!

The economists will no doubt pore over the figures and projections for growth and borrowings. However, in short it appears that the Chancellor is gambling on growth in the future being sufficient to allow his expenditure plans to continue (including £3bn for the Iraq conflict) without necessitating any overt tax rises. Instead he is funding his plans by greatly increased borrowings.

In my pre Budget analysis here I speculated on a number of areas where the Chancellor might try to raise revenues. In the end none of the possible changes have arisen - apart from some potential tweaks to stamp duty that might affect property investment companies who save stamp duty by selling properties via a company rather than separately.

Most of the changes that come in with the new tax year were already known and were set out in my pre-Budget analysis. These include the new National Insurance rates, which are as were announced last year, as are the corporation tax rates and bands.

Income tax allowances remain as for last year while the bands see increases in line with indexation.

• The 10 per cent starting rate band limit rises from £1,920 to £1,960,
  
• The 22 per cent basic rate band limit rises from £29,900 to £30,500.
  
• The top rate of tax for income over £30500 remains at 40 per cent.

There are only a few matters of particular interest to freelancers.

The "Nanny" State

This phrase takes on a new meaning as the Revenue has announced that IR35 will be extended to cover intermediaries that are providing domestic services. This is aimed at the growing number of families who save money by placing their nannies (and apparently a few butlers) into a service company. Apparently some organisations have been marketing this approach to the extent that they have hundreds of nannies working on this basis. The Revenue has obviously decided that this has reached the level where action becomes worthwhile.

The measures are announced in the Revenue’s Budget Note 9 and take effect for income arising on or after 9 April 2003. IR35 currently has an exclusion that means that IR35 does not apply to personal services provided to non-business clients. The change will extend the scope of IR35 “to workers engaged through an intermediary in a domestic capacity”.

Clamp down on tax avoidance

The Revenue is to receive additional funding of £66 million over the next three years to enable them to recruit another 500 officers to strengthen their tax compliance procedures.

The press release indicates that IR35 is just one of the areas to be targeted further as a result of these additional resources. It talks of these new resources “protecting the Exchequer from non-payment of tax and NICs debts and from failure to file tax returns; tackling fraud involving concealment of undeclared income or profits offshore; and countering avoidance of corporation tax and of NICs and tax on employment income. Their target is to raise an additional £1.6 billion over three years.

Flat rate VAT

As announced last year the ceiling for eligibility to use the flat rate scheme is being increased from £100K to £150K from April 2003. Judging by comments from accountants very few freelancers are using the scheme at the moment as the flat rate for many is barely advantageous. For IT services the rate is 14.5 per cent - which rate is applied to the VAT inclusive income. So for example for an IT freelancer whose company is at the new turnover limit of £150K they would have to account for 14.5 per cent of £150K x 17.5 per cent i.e. £25,556. Under the normal VAT rules their turnover of £150K would produce output tax of £26,250.

This is a difference of £695. Hence using the flat rate would only make sense if the total input tax that the company could have deducted came to less than £696 – which equates to inputs of £3971 @ 17.5 per cent. There can be few freelancers with fees of £150K whose deductible VAT inputs are lower than this. So for most the flat rate scheme is a pointless cosmetic exercise in appearing to reduce regulatory and compliance burdens!

Construction Industry Scheme

Details were announced last autumn in the pre Budget report of proposals to amend the CIS.

After consulting on the proposals the Revenue says it will now work with relevant bodies to implement the proposed changes in April 2005. These changes would include the Revenue running a verification service and employers being responsible for determining the status of their sub-contractors.

R&D Tax credit

The R&D tax credit for companies spending more than £25K on R&D, which has been in place since 2000, will be extended by reducing the spending threshold to £10K. This may encourage more smaller businesses to invest in new research.

100 per cent first year allowance for IT investment extended

Finally as predicted in our pre Budget analysis the Chancellor has extended the 100 per cent first year allowance for small companies investing in IT software and hardware for another year.