How to become an IT Contractor - Becoming an IT Contractor

In advance of the emergency budget, a leading contractor accountant outlines his expectations and examines the opportunity the coalition has to review IR35.

In this article, Martin Hesketh, MD of Brookson, provides his predictions for the 22nd June:

The Budget announcement is never typically an easy task for the UK Government; and the new coalition government is now facing possibly one of the most difficult Budget's in the last decade. As the post-election victory buzz has worn off, the government has been working hard to prepare the public for the 'tough decisions' and drastic 'spending cuts' set to be announced. Contractors and the self-employed also wait in anticipation for another big decision...what will happen to IR35?

IR35

The Exchequer Secretary, David Gauke's announcement that the new Government intends to review IR35 is obviously a point of interest to the contracting industry and potentially a huge opportunity for the new Government. Concerns have been raised over the years around the levels of lack of clarity and inconsistency with this piece of legislation and a review will provide an ideal opportunity to address these issues.

While it seems unlikely that such a drastic decision to abolish IR35 completely will be made in the emergency Budget announcement, the industry can expect the Government to commit to a consultation period to review IR35. Brookson welcomes this consultation, particularly if it enables the new coalition Government to genuinely understand the self employed workforce and its needs.

It is worth considering though, the risks involved if the Government does make the wrong decision concerning IR35. For example if the time isn't taken to properly understand the self employed, freelance workforce then this could lead to another flawed and inconsistent piece of legislation being drafted.

Taxation

It has already been announced that the new Government will increase the top rate of Capital Gains Tax (CGT) from 18 per cent to a maximum rate of 50 per cent. Essentially, the reason for this drastic increase is that, to date, the CGT has never generated a massive amount of money for the Government - it only brought in two per cent of last year's £440 billion total tax receipts.

The personal tax allowance (the amount which an individual can earn before they have to pay income tax) is believed to be increasing to approximately £7,500 with an eventual target of £10,000. There is however expected to be an increase in the rate of National Insurance which may negate some of the benefits of an increase in personal allowance for those in PAYE employment. The 50 per cent top rate of income tax introduced from 6th April 2010 is likely to remain in place for some time.

It is possible that there will also be a standard rate VAT increase which could rise as high as 20 per cent, this could heighten inflation, damage economic statistics and result in negative implications for those in lower income brackets. However, it's highly unlikely that this rise will be introduced until 2011.

Small Businesses

The Government is likely to reduce Corporation Tax from 28 per cent to 25 per cent for big companies, with the smaller companies rate cut from 21 per cent to 20 per cent. The decrease in the rate of Corporation Tax could be funded by a reduction in the availability of Capital Allowances.

Brookson is hopeful that small businesses will come out on top in the new Government's policy agenda, especially with the creation of a 'Small Business Credit Adjudicator' which will help ensure that small businesses are treated fairly when applying for bank finance.

Investment

The Chancellor has already announced that the causes of climate change and supporting investment in low-carbon industries are the two main priorities for the new government, which will generate new business opportunities and jobs, and will help to promote sustainable economic growth. However, capital spending cuts could lead to less building of hospitals, schools and network links which could generate negative impact on the building and construction sector.

And finally... Cuts - but with a silver lining for contractors?

With public sector cuts around the corner, there is no doubt that the health and social care service sector is facing tough times ahead. However, as public sector cuts take shape, organisations may find themselves turning to contract workers to fill the gaps and complete projects, without the financial demand of having a full time employee added onto the bottom line. It is here that contracting professionals may find an increase in potential contracts and ultimately a greater demand for the flexible workforce.