IR5.91 analysis

The Revenue’s Plans?
Informed sources with close Revenue contacts have confirmed that at the time of the Pre Budget Report there were no plans at all as to what IR591 would bring. It seems it was a statement of intent rather than a precursor to some fully developed ideas. I understand that those plans are now being developed for presentation this month to Ministers. It seems quite likely that, having launched the idea of IR591, the Government sat back and studied what the many tax experts have been discussing as being the possible changes that IR591 will bring, on the basis that these discussions will identify the best likely alternatives!

Alternatives?
We still do not know whether the Government will go down possible routes such as:

1. Imposing National Insurance on the dividends paid by all closely held companies, or
2. As above but only on those closely held companies that fulfil certain criteria – for example provide services rather than manufacture and /or sell goods.
3. Reducing or removing the tax credit on some or all of the dividends paid by these companies.

We don’t know if they will treat all of the dividends of their target companies under the new regime or seek to distinguish between dividends that are paid out of the additional profits that stem from the directors paying unrealistically low salaries from the ‘super profits’ that stem from the investment of time, expertise or equipment in the business.

References to the abolishing of IR35, even if true, do not necessarily mean that it will not be replaced by something else that is equally damaging to contractors and their post tax incomes.

Politics
Until we know more details it is all idle speculation.

However, I suspect that if the Paymaster General has anything to do with the future plans then she will be adamant that the new regime should not leave those contractors she regards as disguised employees any better off than they would have been under IR35. There may be some marginal trade off of reduced tax revenue (compared to IR35) versus ease of interpretation and application if that will remove what I suspect is an unexpectedly high cost of applying IR35.

But I suspect that any move, which results in contractors trumpeting that IR35 has been killed off and replaced with something that costs them less, will be regarded as unacceptable in what seems to have been a very personal issue for the Paymaster General.

So do not be surprised if IR5.91 introduces something that is aimed at the businesses that can escape IR35 while leaving something in place that still seeks to tax ‘disguised employees’ as if they were employees.

The alternative seems to be a new tax regime that taxes all small closely held businesses as punitively as IR35 affects certain suppliers of personal services. That also seems unlikely. If IR35, which has affected perhaps 100,000 personal service businesses has turned into something of a nightmare for the Revenue then I suspect that this will be as nothing compared to the furore that would arise if 1,000,000, or more, small businesses were to be taxed as if all their profits were the salaries of shareholders.

Consultation?
We have to hope that the Revenue will consult and listen to the various professional bodies that are beginning to express concern that IR591 may be brought in with no detailed consultation. It will not be enough for the Revenue to claim that IR591 is an anti-avoidance measure and it is impractical to give too much away before it is introduced.

The ability of closely held companies to decide how to split their profits between salaries and dividends is not tax avoidance. It is the logical application of the tax regime that has existed for many years. It reflects sound tax and business planning and has been advocated by tax experts for many years.

The Government has the right and ability to change the framework. But sensible, joined-up Government, demands that major changes to the tax framework, around which millions of businesses have developed their business models and plans, are not made without due consultation with all relevant professional and representative bodies and due warning to the businesses concerned.

Conclusions
As a consultant myself I accept I have a vested interest in IR35. My working practices clearly take me outside the legislation so, in that respect, it does not affect me, but much of my work is involved in advising others how to deal with IR35.

Personally Section 660A is more of a concern and I suspect IR591 may have some impact in this area. It may well make the position both clearer and worse!

I also suspect that, come April 2004, there will many more businesses clamouring for information and guidance on how the new tax regime, whatever it is, will affect their business and their plans.

So, speaking personally, I do not see 2004 suddenly reducing the need for tax advice, guidance and tax insurance.

There may well be change. Some issues may become clearer, but I suspect others will become more complex. Only an optimist will assume that this Government is going to make life easier for freelancers and small businesses. Their track record to date has little to suggest that ‘simpler’ and ‘less tax’ are concepts the Government recognises!

If you want to comment on this article please log in and use the Reply button below. Registering is free and easy to do online - see'Join
Shout99'.

Kevin Miller, MA FCA
Kevin Miller Consulting Limited
© Shout99.com 2004