Request for Action

[Ardesco]

IMHO, I don't think that contractors have the moral high ground here. In my 25 years of contracting the consensus has been that "income splitting" was not quite right, many contractors admitted it, many accountants admitted it, they only did it because it was "allowed".

I disagree, we have even had the chancellor who made the original legislation say that it was expected that married couples would arrange their financial arrangements in the most tax efficient way and if this meant "income splitting" so be it.

[TheFaQQer]

IMHO, I don't think that contractors have the moral high ground here. In my 25 years of contracting the consensus has been that "income splitting" was not quite right, many contractors admitted it, many accountants admitted it, they only did it because it was "allowed".

...

I accept that the legislation as drafted will affect people that it is (perhaps) not designed to affect, but by going in, all guns blazing, with the only aim of trashing the change completely, you lose the opportunity to make reasoned changes that might have been acepted.

I agree with you here - I haven't taken the high ground in my letter to my MP. If the legislation was well thought out, and could be implemented in a straightforward manner, so that it's possible for businesses to calculate their tax liability accurately - then I'd possibly support it.

The legislation doesn't impact me anyway, it's the principle of bringing badly planned, impossible to calculate legislation onto the statue books that I'm against.

[malvolio]

Our logic is explained in great detail on the wesbite, so I won't repeat it here, but the key points are that (a) there is no social, financial or economic justification for changing the fundamental principle of independent taxation and nothing has happened that would require this change and (b) the proposal is so badly drafted it will impact well over ten times as many businesses as it's meant to. Secondly it's not our intention or our job to help HMG draft legislation properly, but merely to point out where they have made (or are about to make) a huge mistake.

I don't disagree that some contractors' tax avoidance is perhaps a step too far (lunchtime expenses anyone?) but the point is that if you want to avoid people hiding behind loopholes, then simplify things so the loopholes go away, don't introduce a whole new set. Nobody really objects to paying taxes as long as they are paying them on the same basis as everyone else in the same position.

[ASB]

But there's a cost to "trying too hard", you annoy the opposition so they take no notice of you at all.

IMHO, I don't think that contractors have the moral high ground here. In my 25 years of contracting the consensus has been that "income splitting" was not quite right, many contractors admitted it, many accountants admitted it, they only did it because it was "allowed".

And it is also disingenuous of people to argue that it is an unexpected change that they don't have time to plan for. Anybody who has been following the Arctic case knew damned well that it was going to come immediately, if the IR lost.

I accept that the legislation as drafted will affect people that it is (perhaps) not designed to affect, but by going in, all guns blazing, with the only aim of trashing the change completely, you lose the opportunity to make reasoned changes that might have been acepted.

Just my 2p worth.

BICBW

tim

It's not a popular view. but I must say I do largely agree. The whole IR35, S660, income splitting thing has largely come about because of a huge explosion in the number of people working in this way.

Before about 1985 it was not generally cost effective to do anything other than a full salary of effectively all spare cash within a close company. Then some rules were relaxed - with the aim of encouraging enterprise - these were basically the abolition of the investment income surcharge and the abolition of the deemed distribution rules.

At this point in time there was reckoned to be only about 2000 people operating in the UK as contractors in this manner. This figure has risen to something in the order of 100,000 now.

It always seemed perverse to me that I was able to disguise most of what was my income and convert it into investment income and distribute it in a manner which reduced my tax/ni burden by as much as 75% (in certain circumstances). This was of course an arrangement I wholly approved of and pursued aggressively - they were not my rules after all - but it was undeniably odd.

I don't think IR35, S660 Income Splitting are in any way the answer though. They are simply too arbitrary. In a number of ways they are all tax by terrorism.

The real solution, in my view, is the complete overhaul of our tax system. Why are there so many difference in the treatment between earned and unearned income? Why can't everyone claim the costs associated with earning their income against that income ? Why should one pay a higher rate of tax simply because one earns more ?

The problem is that the government can't simply legislate people into being reasonable. If everyone paid themselves a "market salary" then it seems reasonable that the surplus could be distributed in any way the company owners thought fit. Of course this is entirely unworkable - because it would again become purely arbitrary.

Until such point as our government gets serious about overhaul of the tax/benefit system there are going to be constant targeted attacks on those it perceives as "milking the rules". Of course this will never happen.

[TheFaQQer]

I don't think IR35, S660 Income Splitting are in any way the answer though. They are simply too arbitrary. In a number of ways they are all tax by terrorism.

The real solution, in my view, is the complete overhaul of our tax system. Why are there so many difference in the treatment between earned and unearned income? Why can't everyone claim the costs associated with earning their income against that income ? Why should one pay a higher rate of tax simply because one earns more ?

...

Until such point as our government gets serious about overhaul of the tax/benefit system there are going to be constant targeted attacks on those it perceives as "milking the rules". Of course this will never happen.

Single rate of income tax.

Consolidate all income into one big pot, so it doesn't matter where it comes from - income, dividend, pension...

Dead easy, but no government will introduce it in this country.

[malvolio]

There are two simple answers actually - bin S134c so we can operate as sole traders and so sit inside a known, acceptable taxation framework and raise the zero band tax rate to £12k.

[tim123]

I disagree, we have even had the chancellor who made the original legislation say that it was expected that married couples would arrange their financial arrangements in the most tax efficient way and if this meant "income splitting" so be it.

So that's the old, "The rule was like this 15 years ago so it can't be changed now" line. Sorry. governments are entitled to change their mind, there's no statute or case law that says they can't.

In any case, the critical point is that this form of incoming shifting is only available to couples who "incorporate". The SE person can't income share with their spouse, the employed person can't income share with their spouse.

The moral argument that needs a reply is not "why should couples be allowed to income shift", it is "why should this tax break only be available to those people who package their employment up in an incorporated company when it is not available to couples that don't"?

And please don't give me the guff about the spouse sharing the risk. In any family unit where only one person works, and that person works in a high risk job, the spouse shares the risk of the partner failing at that job and the whole family having no income.

There are probably a million or more couples out there taking a similar risk to a contracting couple who have no possibility of income sharing to mitigate that risk. ISTM that the risks of being a contractor, where you are placed in assignments using agency contacts, is far far lower than the risk taken by someone entering Self Employment where they have to find their own work, or a person being promoted to a sales role for the first time.

tim

[TheFaQQer]

So that's the old, "The rule was like this 15 years ago so it can't be changed now" line. Sorry. governments are entitled to change their mind, there's no statute or case law that says they can't.

The issue is that they are now deliberately legislating to tax those that followed their advice. It's kind of like them giving everyone free cigarettes for years, getting them addicted, and then taxing them heavily.

In any case, the critical point is that this form of incoming shifting is only available to couples who "incorporate". The SE person can't income share with their spouse, the employed person can't income share with their spouse.

And yet, if they divorce, they are entitled to an equal split. And if they sell the company, they can pool their tax allowances to lower the tax burden, but you can't share it when you run the business.

The moral argument that needs a reply is not "why should couples be allowed to income shift", it is "why should this tax break only be available to those people who package their employment up in an incorporated company when it is not available to couples that don't"?

You're right - married couples should be allowed to pool their tax allowances. Then there's no loophole for people to exploit - everyone can do it regardless of their employment status or source of income. I'd even extend that further - each person can pool their tax allowance with one person that they nominate. Dead easy, no loopholes.

[tim123]

Our logic is explained in great detail on the wesbite, so I won't repeat it here, but the key points are that (a) there is no social, financial or economic justification for changing the fundamental principle of independent taxation and nothing has happened that would require this change and (.

As per my other reply.

This has got nothing to do with Independent Taxation, and IMHO focusing on it will get you nowhere.

It about a difference between the taxation of couples who incorporate and couples who do not.

In an situtation where only one member of a couple "works", workers who do not ply their trade through an incorporated business cannot income share, so why should workers who do incorporate be allowed to do so?

I accept that there is a problem with the definition of "works" and that there are some couples for which this is not going to be clear. But for the vast majority of freelancers, the spouse provides minimal business input and the worker would not notice if the spouse where unavailable to provide that service. (And for the vast majority of, what the man in the street understands as a "family business", it is perfectly clear that both parties do "work").

tim

[TheFaQQer]

I accept that there is a problem with the definition of "works" and that there are some couples for which this is not going to be clear. But for the vast majority of freelancers, the spouse provides minimal business input and the worker would not notice if the spouse where unavailable to provide that service. (And for the vast majority of, what the man in the street understands as a "family business", it is perfectly clear that both parties do "work").

tim

My wife works at least 20 to 30 hours a week for our business, but doesn't bring in much money for it. How do I put a value on what she contributes to the business?

And for that reason, she's not a shareholder as I don't want to risk the investigation and having to prove what she does for the business to justify her share.

It's just not fair