On 23 March 2011, George Osborne presented his second Budget. While the dust has now settled on this, we have been waiting to hear about any impending changes to income shifting (also known as S660).
In summary the Budget was not too bad for contractors. While there was the usual shifting of personal allowances, and higher rate earnings bands, the overall affect is about neutral for our clients. And the drop in Corporation Tax from 21% to 20% effective from 01 April 2011 will be gratefully welcomed by all our clients.
So here goes a summary of the changes that will impact our clients who work using their own limited company.
IR35 is staying for the time being
This issue was being closely watched, but for the time being the main message is it is still business as usual for IR35. The government has decided to retain IR35 as abolition would put substantial revenue at risk. They have announced they will however make improvements in the way IR35 is administered – which we will of course be keeping an eye on.
Corporation tax reduced
As announced in last year’s Budget, the small company rate of corporation tax paid by contractor limited companies falls by 1% to 20% from 1st April 2011.
VAT registration threshold changes
The threshold for which VAT registration is compulsory usually increases a little every year. This year the threshold is set at £73,000 with effect from 01 April 2011.
Increase in the mileage rate claimable
From 6 April 2011 the rate you can claim for mileage (when using your own car for business travel) was increased from 40p per mile to 45p per mile for the first 10,000 miles of business travel in the tax year. The rate for mileage above 10,000 miles remains at 25p per mile.
Non-domiciled taxation review
Personal taxation on individuals not domiciled (but resident for tax purposes) in the UK is complicated. The government will start a consultation process on changes to non-domiciled taxation from April 2012. So we will have to live with the existing rules for at least another year.
Legislation will be introduced from 6 April 2011 to tackle arrangements using trusts (and other vehicles) to reward employees who seek to receive payments for services in a tax efficient way (often using some form of loan arrangement with an offshore company). We have long held the view these should be given a wide berth, and the legislation here just helps the HMRC enforce the position that contracting using an offshore company, and receiving some money in the form of a loan, is a VERY bad idea.
Income Shifting (also known as S660)
A typical example of this is where a husband contracts full-time using a limited company of which both he and his wife are shareholders (or vice versa of course!), and both parties receive dividend income. This can be beneficial if the contractor’s partner earns less than the higher rate earnings band. No special announcements have been made about this, and although we know the HMRC dislike this, it remains an opportunity worth consideration.