HMRC today published an overview of all the new rules included in the Finance Bill 2016, including many important changes for freelancers and contractors.
We’ll dive into the detail shortly, but it’s worth noting up-front that the inclusion of a 1-month rule, 6-month rule or otherwise appears to have been delayed. The rules as they had been described previously could have been incredibly damaging to the micro-business community, so for now we’re breathing a sigh of relief. In fact there’s surprisingly little mention of IR35 despite the huge debate and extensive consultation various arms of government have undertaken recently including HMRC and the Office of Tax Simplification. The 2016 Budget statement in March next year could well be when all the IR35 decisions come through.
Many other measures announced previously were confirmed, though.
Dividend tax changes
Government appear committed to implementing the dividend tax rise without introducing any relief for middle and lower-earning directors, who will be hit hardest. We will continue to argue for changes to these rules to mitigate the impact on smaller businesses.
As it stands now, from 6th April the dividend tax credit will be abolished and replaced with a £5,000 dividend allowance. UK residents will pay tax on any dividends received over the £5,000 allowance at a rate determined by their personal tax band. More details on how these rules will affect you here.
Travel and subsistence expenses
As previously announced, if your contract is inside IR35 you will lose the tax benefit of claiming travel and subsistence expenses. There had been rumours that these changes would apply to all contractors, so limiting the rules to the comparatively small amount caught by IR35 means the impact of these changes will be smaller.
Individuals who supply their services through Personal Service Companies, will no longer be able to claim tax relief for those contracts where they are inside IR35 or they would otherwise be inside IR35 if they weren’t receiving all their remuneration as employment income.
Members’ Voluntary Liquidations
HMRC is tightening rules around the distribution of capital when a company is closed. Members’ Voluntary Liquidations distribute company funds as capital rather than salary (meaning they are subject to capital gains tax rather than income tax), normally making them a more tax-efficient way to close your company. The new rules will remove this advantage if the director “continues to be involved in a similar trade or activity” within two years of receiving the funds.
Wear and Tear Allowance
Of interest for clients with Buy to Let properties, the wear and tear allowance for fully furnished properties is replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they incur on replacing furnishings, appliances and kitchenware in the property. The deduction will be available in calculating the profits of a property business which includes a dwelling-house. The deduction is available for capital expenditure on a replacement item provided for use in the dwelling.