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| CURRENT SECTION :: IR35 / IR591 | UK's most visited IT Contractor Site - 250k unique visitors March 2008 |
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By now you will probably have heard about IR591 and the impact it could have on Contractors in the UK. A lot has been said, so it is advisable to look at the details in the paragraph in full. The paragraph is 5.91 of the 2003 Pre-Budget Report, which states: “The Government has introduced a range of measures and targeted tax reductions to support small businesses; including through reform of capital gains tax, reducing the rate of corporation tax for small companies and the introduction of a zero rate, Stakeholder Pensions, and the abolition of advance corporation tax. These measures are encouraging the creation of more small companies, including through self-employed people incorporating their businesses. The Government is keen to ensure the measures it has introduced provide support for these firms taking on the opportunities and responsibilities involved in that transition, and to encourage them to reinvest their profits and grow their businesses. At the same time, the Government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals’ tax liability, and that support should continue to be focused on growth. The Government will therefore bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company, and so protect the benefits of low tax rates for the majority of small businesses.” Although this is only a very small part of the Report it is the one paragraph that may have the most impact on Contractors. There have been a lot of individuals persuaded to form their own Limited companies as they have been advised there are tax concessions from the Government. After working as a Tax Inspector and an Auditor, I am well aware that the Inland Revenue doesn’t always give concessions unless there is a benefit to the Government. The Inland Revenue collates as much information as possible before deciding on which companies to inspect either under PAYE (Pay As You Earn) or by checking accounts information for Corporation Tax Reviews. One of the best sources of information is from accounts submitted to Companies House as these are generally more detailed that information on a Revenue return. So, the concessions you may have earned may actually increase the risk of your next Revenue visit. You may have seen the previous article on 18 December 2003 previous article which highlighted the concerns that there could be a National Insurance levied on dividend payments. Under present rules if a director draws a dividend there is only 32.5% to pay above the basic rate tax limit. This is considerably less than paying a wage, which could be liable to Tax at 40% and additional National Insurance. You will also notice that the Revenue is trying to bring Tax and National Insurance (NIC) into line with each other. There are very few payments that are not the same, dividends are one of them (and Payments in Lieu of Notice is another). Nobody is exactly sure if this is what the Revenue is planning but it would certainly increase revenue to the Government and would allow them to suggest that they are bringing Tax and NIC into line and streamlining the Tax system. This would also allow an increase in revenue without increasing Tax rates. So what should you do now? Well, as no one knows exactly what the Revenue means we will have to wait. From the Revenue’s point of view this would be very easy to administer and could net the Government over £1 billion per year. This could easily be increased each year in the Budget as it would be a NIC increase not a Tax increase. It may mean that genuine self-employed contractors will still be in a better position based on the expenses that they can claim and also the rate of Class 4 NIC paid on their profits. Is this the end of IR35? It may be, as the Revenue has spent large sums of money fighting Court cases and Commissioners cases without a lot of success. An increase of NIC on dividends would be a simple solution, which would certainly bring large amounts of revenue for the Government. Regular updates will appear on the Contractor UK site as soon as the information is received so ensure that you check regularly for updates. Article kindly provided by Ray McMahon http://www.taxandnic.com Jan 15, 2004 Email this article Printer friendly page Previous Page
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