New Tax for Small Ltd Companies and Contractors
Discussion
PCG on full alert after announcement of new tax
======================================
measures for small businesses
==========================
In his Pre-Budget Report on Wednesday 10 December 2003, the
Chancellor of the Exchequer sent shivers through the ranks of UK
small businesses with the announcement of "specific proposals ... to
ensure that the right amount of tax is paid by owner managers of
small incorporated businesses on the profits extracted from their
company". This is very similar to the way in which the original IR35
proposals were "announced".
Whilst the report does not outline the proposed measures in any
detail, it does refer to Government concerns about "the
longstanding differences in tax treatment between earned income
and dividend income." PCG understands that the proposed
implementation is likely to involve charging National Insurance on
dividends from close companies, that is, those companies with five
shareholders or fewer. It is not yet clear what rate would be applied,
how corporate shareholders would be treated, or whether
entitlement to NI-related benefits would be endowed. Ironically, such
a move was itself ruled out within the IR35 Regulatory Impact
Assessment, on the grounds that "it would be extremely difficult to
devise effective legislation which could define dividends in such a
way so as to exclude dividend income which originated from genuine
enterprise and investment."
What is PCG doing about the Pre-Budget Report proposals?
================================================
It is not clear from the Pre-Budget Report what will be the likely
impact of the proposals on freelancers, but PCG will be looking into
this issue as a matter of priority and has already planned a
comprehensive range of activities.
Freelancer road shows brought forward
================================
PCG had planned a series of road shows for February and March next
year, to allow PCG members and other freelancers to consult with
experts about IR35, Section 660A, marketing, developing skills and
various other issues affecting freelancers. In light of the Treasury
announcement yesterday, PCG has decided to bring the road shows
forward to January and February instead, and to include in the
program all available details of the new tax measures.
PCG chairman Simon Griffiths said, "While we don't yet know
exactly what is planned, this will obviously worry the whole UK small
business community. Freelancers, through PCG, will have access to
a source of expert information, and the road shows will give them
an opportunity to discuss their concerns face-to-face with some of
the country's most talented tax specialists. It will also give us the
opportunity to hear members' views on what our stance should be,
first hand."
Venues for the first seven road shows are likely to include London,
Manchester, Birmingham, Southampton, Croydon, Bristol and
Swindon.
Major consultation initiative launched
==============================
The other major strand of PCG activity on this issue will of course
be to lobby on behalf of its members within the corridors of power.
PCG is forming a special policy group to handle this specific topic,
and is urgently seeking liaison on details of policy and its
implementation with officials and ministers at HM Treasury and
Department of Trade and Industry (DTI).
External Affairs Director Ian Durrant said, "Although we do not yet
know the full details of what is being proposed, we obviously have
deep concerns about measures that could potentially act as a
disincentive to the UK's flexible, highly-skilled freelance workforce.
We are keen to participate in a constructive discussion with the
Government on this matter, given our in-depth understanding of the
UK's micro-business community."
Names of the special policy group members will be announced soon.
Facilitation of internal communication and debate
PCG's online IR35 forum has today been renamed to include "5.91",
the name by which the new measures are currently being referred,
as this was the paragraph number of the relevant article in chapter
five of the Pre-Budget Report 2003.
This forum will contain up-to-date details of these and other
measures, to facilitate discussions about these measures between
PCG members, their peers and tax experts. A lively discussion
thread on the subject has already been initiated by concerned
members.
Conclusion
=========
Summarising PCG's views on yesterday's report, Simon Griffiths
said, "The Government has announced that there will be changes to
how owner-manager companies will be taxed after April 2004. PCG
represents over 11,000 small businesses of whom over 95% fall into
this category. PCG recognises that recent legislative changes have
caused great upheaval and concern for small businesses, and we
therefore call upon the Government to engage in a wide-ranging
consultation process so that these changes can be used to enable
small businesses to prosper."
Notes
=====
The full text that appears in the Treasury Report is as follows:
5.91 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 smaller 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.
======================================
measures for small businesses
==========================
In his Pre-Budget Report on Wednesday 10 December 2003, the
Chancellor of the Exchequer sent shivers through the ranks of UK
small businesses with the announcement of "specific proposals ... to
ensure that the right amount of tax is paid by owner managers of
small incorporated businesses on the profits extracted from their
company". This is very similar to the way in which the original IR35
proposals were "announced".
Whilst the report does not outline the proposed measures in any
detail, it does refer to Government concerns about "the
longstanding differences in tax treatment between earned income
and dividend income." PCG understands that the proposed
implementation is likely to involve charging National Insurance on
dividends from close companies, that is, those companies with five
shareholders or fewer. It is not yet clear what rate would be applied,
how corporate shareholders would be treated, or whether
entitlement to NI-related benefits would be endowed. Ironically, such
a move was itself ruled out within the IR35 Regulatory Impact
Assessment, on the grounds that "it would be extremely difficult to
devise effective legislation which could define dividends in such a
way so as to exclude dividend income which originated from genuine
enterprise and investment."
What is PCG doing about the Pre-Budget Report proposals?
================================================
It is not clear from the Pre-Budget Report what will be the likely
impact of the proposals on freelancers, but PCG will be looking into
this issue as a matter of priority and has already planned a
comprehensive range of activities.
Freelancer road shows brought forward
================================
PCG had planned a series of road shows for February and March next
year, to allow PCG members and other freelancers to consult with
experts about IR35, Section 660A, marketing, developing skills and
various other issues affecting freelancers. In light of the Treasury
announcement yesterday, PCG has decided to bring the road shows
forward to January and February instead, and to include in the
program all available details of the new tax measures.
PCG chairman Simon Griffiths said, "While we don't yet know
exactly what is planned, this will obviously worry the whole UK small
business community. Freelancers, through PCG, will have access to
a source of expert information, and the road shows will give them
an opportunity to discuss their concerns face-to-face with some of
the country's most talented tax specialists. It will also give us the
opportunity to hear members' views on what our stance should be,
first hand."
Venues for the first seven road shows are likely to include London,
Manchester, Birmingham, Southampton, Croydon, Bristol and
Swindon.
Major consultation initiative launched
==============================
The other major strand of PCG activity on this issue will of course
be to lobby on behalf of its members within the corridors of power.
PCG is forming a special policy group to handle this specific topic,
and is urgently seeking liaison on details of policy and its
implementation with officials and ministers at HM Treasury and
Department of Trade and Industry (DTI).
External Affairs Director Ian Durrant said, "Although we do not yet
know the full details of what is being proposed, we obviously have
deep concerns about measures that could potentially act as a
disincentive to the UK's flexible, highly-skilled freelance workforce.
We are keen to participate in a constructive discussion with the
Government on this matter, given our in-depth understanding of the
UK's micro-business community."
Names of the special policy group members will be announced soon.
Facilitation of internal communication and debate
PCG's online IR35 forum has today been renamed to include "5.91",
the name by which the new measures are currently being referred,
as this was the paragraph number of the relevant article in chapter
five of the Pre-Budget Report 2003.
This forum will contain up-to-date details of these and other
measures, to facilitate discussions about these measures between
PCG members, their peers and tax experts. A lively discussion
thread on the subject has already been initiated by concerned
members.
Conclusion
=========
Summarising PCG's views on yesterday's report, Simon Griffiths
said, "The Government has announced that there will be changes to
how owner-manager companies will be taxed after April 2004. PCG
represents over 11,000 small businesses of whom over 95% fall into
this category. PCG recognises that recent legislative changes have
caused great upheaval and concern for small businesses, and we
therefore call upon the Government to engage in a wide-ranging
consultation process so that these changes can be used to enable
small businesses to prosper."
Notes
=====
The full text that appears in the Treasury Report is as follows:
5.91 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 smaller 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.
Plotloss said:
First IR35 now this.
How is one supposed to get a foothold as a startup these days?
More counter productive short sightedness from New Myopia.
May all Gordon Browns children have small dicks....and that includes the girls!
Hmmm, in 2 minds about this one, the Majority of people i know pay the correct amount of taxes, however there is a larger population that tend to bend the rules slightly.
Small salary and huge end of year bonus/dividend.
Maybe there is a need to review the way taxes are paid...
But lets do it in a structured and consultative way.
That however doesnt mean that i agree with what is being done...
Hughesie2
PetrolTed said:
I heard about this on the radio at the weekend.
I don't like it as I'd have to pay more tax. Whether that's right or wrong could be argued either way I guess.
5 shareholders or more? Time to distribute shares to members of the family then?
They will be well on top of the 5 shareholders all in the same family position and will probably come back at you later for it.
PetrolTed said:
I can see why they might want to clamp down on dividend 'abuse' amongst high earners but aside from the first £10K of profit not attracting corporation tax I've yet to see much evidence of the Government helping small businesses.
Totally agree with you Ted, but i think its because of the abusers that everything is being clamped down on.
7 years working with contractors (IT and Telecom) and i personally think the government is right to clampdown on the abusers.
Its unfortunate that it will affect the vast majority of legitamate people as well...
Hughesie2
IR35 specifically blocked the ability of shareholders in "contractor" type companies from making use of the beneficial tax and NI arrangements possible through the use of dividends rather than salaries. IR35 was possible becuae the Chancellor was able to argue that "contractors" were not really trading in the true sense and therefore it was OK to convert their income into Salary Equivalent.
Based on the article quoted here, is he now arguing that small family companies are not "trading" in the true sense and therefore an IR35 type application of law can be forced on these small companies? If so, why stop at limited companies. Why doesn't he force small sole traders and partnerships to apply PAYE and Class 1 NI regulations to their propprietors' incomes from their own businesses. Setting a lower limit of 5 shareholders has no bearing on the size of a small business. It all sounds very arbitary and ill thought out.
I reckon he is on extremely dodgy ground here and it may be just another case of Government kite flying.
Based on the article quoted here, is he now arguing that small family companies are not "trading" in the true sense and therefore an IR35 type application of law can be forced on these small companies? If so, why stop at limited companies. Why doesn't he force small sole traders and partnerships to apply PAYE and Class 1 NI regulations to their propprietors' incomes from their own businesses. Setting a lower limit of 5 shareholders has no bearing on the size of a small business. It all sounds very arbitary and ill thought out.
I reckon he is on extremely dodgy ground here and it may be just another case of Government kite flying.
Basically, like IR35, it's just greed and envy, picking on people who are likely to be soft targets, unable to afford proper representation & advice and who are far more likely to cave-in when the IR put on the pressure.
I heard Brown on the radio the other day, hard at work blurring the boundaries between tax avoidance and tax evasion, which is a very cynical trick to turn on the general public who may well not realise that avoidance is perfectly legal and something that almost every worker does to a certain extent merely by following the revenues old rules. Example: paying into a pension? Well, you're avoiding tax.
But there's much worse going on with people who are far wealthier who can afford to make sure they pay far less "tax", of whatever flavour.
My best advice is to join the PCG and take full advantage of their package of advice and representation. I certainly did.
I heard Brown on the radio the other day, hard at work blurring the boundaries between tax avoidance and tax evasion, which is a very cynical trick to turn on the general public who may well not realise that avoidance is perfectly legal and something that almost every worker does to a certain extent merely by following the revenues old rules. Example: paying into a pension? Well, you're avoiding tax.
But there's much worse going on with people who are far wealthier who can afford to make sure they pay far less "tax", of whatever flavour.
My best advice is to join the PCG and take full advantage of their package of advice and representation. I certainly did.
PetrolTed said:
I can see why they might want to clamp down on dividend 'abuse' amongst high earners but aside from the first £10K of profit not attracting corporation tax I've yet to see much evidence of the Government helping small businesses.
This is the bit that really bugs me. Last year, he "encouraged" partnerships and sole traders to become Ltd companies, then this year he kicks us all in the nads again. Nasty tactics IMO.
Must remember "encourage" in government speak actually means "penalise" in English.
I wonder how he will be able to justify treating small companies differently to larger companies. Is he going to outlaw the use of dividends for small owner managed companies completely? If a company is a genuine trading entity (not a substitute for employment) then why should it be penalised compared to a larger trading company?
Is this not yet another fundamental attack opon the notion of a limited liability enterprise.
Is this not yet another fundamental attack opon the notion of a limited liability enterprise.
whatever said:
I heard Brown on the radio the other day, hard at work blurring the boundaries between tax avoidance and tax evasion, which is a very cynical trick to turn on the general public who may well not realise that avoidance is perfectly legal and something that almost every worker does to a certain extent merely by following the revenues old rules. Example: paying into a pension? Well, you're avoiding tax.
I always understood it as thus:
Tax efficiency: arranging your financial affairs within the existing rules in such a way that you pay the minimum amount of tax possible. All perfectly legal.
Tax avoidance: not paying the correct amount of tax due to incorrect accounting or ignorance/lack of understanding of the rules. If found out you'll have to pay the extra tax plus interest and probably a penalty depending on circumstances. I think a lot of small (and large) companies are guilty of this in one way of another even if it's only a few pounds that slipped through the net due to the complexity of the current system and self-assessment.
Tax evasion: deliberately and knowingly arranging your financial affairs so that you don't have to pay tax on all or part of your income. Highly illegal and you're likely to go to prison if caught.
Based on the above I would say your example of paying into a pension would be tax efficient but not tax avoiding?
Either way it doesn't surprise me that GB is trying to blur the lines and portray all entrepreneurs as money grabbing tax avoiding con artists
eric mc said:
I wonder how he will be able to justify treating small companies differently to larger companies. Is he going to outlaw the use of dividends for small owner managed companies completely? If a company is a genuine trading entity (not a substitute for employment) then why should it be penalised compared to a larger trading company?
Is this not yet another fundamental attack opon the notion of a limited liability enterprise.
He already seems to have done it once with IR35. Revenue from an EDS/Accenture etc contractor that works on a single site for three years doing the same role as a contractor that’s caught by IR35 will not be liable to the same tax as the contractor would pay. He’s set the precedent already.
Labour are control freaks. They like people to be working for large corporations where they and the IR can keep an eye on them. They don’t want small companies and one man businesses popping up left right and centre because it’s a pain in the a** to keep an eye on them all. This fact is made quite clear by the fact that their economic policy seems singularly defined to stamp out small businesses.
Perhaps that's true but ironically, it was Brown's major changes to company taxation (e.g. the £10,000 Zero percent CT rate) which encouraged the formation of thousands of new companies in the last few years.
The Inland Revenue (ever since Furness V' Dawson in 1984) have had the option to disallow a transaction, or a series of transactions, if those transactions had been set up with the saving of tax as a primary motive. Even if the transactions were within the law, if they did not have an overiding commercial reality behind them, they would be disallowed. This was a very refined version of the long established "Wholly and exclusively for the purpose of the trade" rule.
What we seem to be getting here is a two tier system of interpretation, small owner managed companies being treated much more harshly than larger companies. Maybe this will result (finally) in someone taking this government to the European Court of Human Rights.
>> Edited by eric mc on Monday 15th December 22:51
The Inland Revenue (ever since Furness V' Dawson in 1984) have had the option to disallow a transaction, or a series of transactions, if those transactions had been set up with the saving of tax as a primary motive. Even if the transactions were within the law, if they did not have an overiding commercial reality behind them, they would be disallowed. This was a very refined version of the long established "Wholly and exclusively for the purpose of the trade" rule.
What we seem to be getting here is a two tier system of interpretation, small owner managed companies being treated much more harshly than larger companies. Maybe this will result (finally) in someone taking this government to the European Court of Human Rights.
>> Edited by eric mc on Monday 15th December 22:51
stc_bennett said:
I listened to his speach and am a little concenred that my tax bill is going to increase. I dont mind paying tax but with in reason.
LOL that happens every year Steve - a fact of life. The more succesful you are the more you get stung.
This particular loopy - was really only a matter of time before it got stopped.
>> Edited by Broccers on Tuesday 16th December 00:06
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