Recent tax changes for IT Contractors

The IT contracting sector is booming at the moment, particularly in the area of Cybersecurity and GDPR. If you are looking to enter into the IT contractor market for the first time or are looking to re-enter it following a period of leave, we discuss the tax changes that are currently affecting IT contractors.

IR35  

IR35, a small word but one that has a big impact. Originally introduced in April 2000, it is used by HMRC to combat ‘disguised employment’.

In April 2017, the way the IR35 status of a public-sector contractor is determined changed. The end user (the client) is now responsible for determining this status, not the contractor themselves.

The Chancellor, Phillip Hammond announced that a consultation paper on IR35 reform will be published early this year. With changes expected to take place sometime in 2019.

Tip: To prepare for these changes, we advise that all new contracts are subject to an IR35 review. This review will highlight any areas of ambiguity and can give advice on how to mitigate the risk of IR35.

VAT Flat Rate Scheme

The Flat Rate Scheme was introduced to simplify the VAT accounting system for small businesses. Under this scheme, the rate at which VAT is calculated is determined by the trade sector the falls within. For an IT Contractor this is 14.5%.

However, HMRC took the view that this scheme was being ‘taken advantage’ of. To combat this, changes were introduced in April 2017. This change meant all limited cost traders must now calculate VAT at 16.5%.

The first step is deciding if you fall into the category of what HMRC call ‘limited cost traders’.

HMRC, class a limited cost trader as:

• a business whose VAT inclusive expenditure on goods less is than 2% of its turnover (or less than £1000)
• any service business (i.e. not selling goods)

This change means that many small businesses, including contractor, consultants and freelancers, will now to have pay more VAT than they did previously. This, puts forward the questions, ‘Is it even worth being part of the Flat Rate Scheme anymore?’

If you are questioning whether it is worthwhile to join the scheme. Or, are already on the scheme and are thinking of leaving, please seek professional guidance before making any decision.

Dividend tax allowance

Changes to how dividends are taxed were introduced in April 2016. As part of this change, a £5,000 dividend ‘tax allowance’ was introduced. This means that the first £5,000 of dividends made in a tax year are tax free.

This is ‘tax allowance’ is being reduced to £2,000 from 6 April 2018.

Changes to finance cost deductions for property income

If you are a contractor who is investing in the future through buy-to let-properties, you may find that the yields you receive are reducing.

Landlords are no longer able to deduct the full cost of their mortgage interest from the rental income they receive when calculating the profit to pay tax on.

Instead, tax is now calculated on gross profit, rather than after the mortgage interest has been deducted. With a % of the mortgage interest being deducted after this.

This change is being gradually rolled out and will be fully implemented by 2020.