Autumn Statement – How does it affect contractors?

5th December 2016

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The Autumn Statement has become a hot topic for a lot of contractors since it was  released two weeks ago. Here at iContract, we have listed the key changes that affect contractors:

The good news:

The Government announced the following plans:

  • To reduce Corporation tax to 17% by 2020;
  • To spend £23bn on innovation over the next five years;
  • To review R&D tax credits and provide an extra £2bn a year in R& D funding;
  • To provide £500,000 a year for FinTech specialists and envoys; and
  • To inject £400m in venture capital funds to help tech firms unlock £1bn of new finance.

What about the ‘not so good’ news?

  • Public sector personal service company (‘PSC’) IR35 reform: HMRC has been planning changes for a while and it came as no real surprise.  From April 2017, the responsibility for assessing whether a public sector PSC falls within IR35 will be shifted to agencies and employers. If a public sector PSC has been deemed as inside of IR35, then the agent or employer will have to withhold tax through PAYE on the PSC’s behalf.  iContract understands industry bodies may seek to challenge this change before this becomes legislation.
  • Scrapping of 5% tax free expenses for a public sector PSC: The 5% tax free expenses rule was initially introduced to help contractors with IR35 administration but this will be scrapped from April 2017.
  • New VAT flat rate scheme of 16.5% for PSCs with limited costs: If a PSC incurs costs on “goods” of less than 2% of VAT inclusive turnover, or less than £1,000 a year, it will fall into this flat rate category.  iContract is aware that there is a short consultation underway on this, so we will monitor this when final legislation is published in March 2017.

iContract Comment:

Given the significant increase in the freelancing/contracting population in the last few years, we believe the government is taking a backwards step that complicates this ever increasing market.  By forcing the agencies and employers to assess the IR35 position, contractors with public sector end-clients will lose the autonomy of their own finances and taxes.  Withholding tax on a PAYE basis essentially makes public sector contractors employees without benefits.

However, contrary to the common belief that agencies will push public sector contractors to be within IR35 to mitigate its own risks, many agents have stated that they will not blindly push all contractors to be within IR35.  The fear is that by doing so, they will risk losing public sector contractors to the private sector. Contractors are a flexible work force by nature, so it doesn’t take long for them to shift from one sector to another. So far, there is no talk of applying similar regulations in for private sector end-clients.

The “limited costs” VAT scheme is also bad news for many contractors who are currently under the “Management consultancy” 14% flat rate VAT category. as the extra 2.5% VAT that will have to be handed over to HMRC will directly reduce the final ‘take home’ payments for contractors.

If any of the changes above are likely to apply to you, iContract recommends that you speak to your accountant and agent to clarify your position and prepare for any changes next year once the final legislation becomes clear.

On a positive note, the government has signalled a willingness to be pro innovation and entrepreneurship and the fall in corporation tax will be an advantage – especially to those contracting in the private sector. For those of you caught by the Autumn Statement, perhaps it’s time to consider alternative options and iContract is perfectly placed to help!

iContract helps contractors to find your next contract opportunity and connect with recruiters.  Whichever sector you are in, we hope we can help you to stay ahead of the market.