IR35 - HMRC's View

[Tarquin Farquhar]

Ah, sorry. I thought you were after a "fair" tax system.

How does NICs on all dividends treat the elderly "fairly", considering their pension pots have already been robbed by Brown?

If you have income, you should pay social contributions on it. No ifs or buts. That's fair.

The income (e.g. a pension or dividend income) has NOT had tax paid on it already. It may well be that the income comes from savings that themselves come from previous income that itself was taxed at the time, but no way does that mean that this current income is already taxed.

So yes, it is fair to tax dividends. And pensions.

[ASB]

What if the Conservatives were elected and do scrap IR35; they will need to get taxes from somewhere to make up the huge deficit, what would be the easiest way? NIC's on dividends?

Ah nothing new there though. There was the old "unearned income surcharge". Think it was 15%? Ended in about 84 I think. Also applied to all dividends from all companies IIRC, effectively equalized the differential between earned and unearned income.

Then there was the "close company deemed distribution rule", so that if a close company did retain profits it was taxed as though they had been paid as dividends. Abolished around about the same time.

In this regime the effective result was it wasn't cost effective for a small company to retain profits and whether it paid out in salary or dividends the slice of the pie the exchequer got was about the same.

Showing my age again...

[PhilBreeze]

Anthony - HMRC's view has been challenged successfully by the taxpayer 5 times at the Special Commissioners to the best of my knowledge:

LIME-IT vs Justin [2002]
Tibury vs Gittins [2003]
Ansell vs Richardson [2004]
First Word Software vs HMRC [2007]
Datagate Services vs HMRC [2007]

Because there is no statutory definition of an employee, HMRC and The Courts must use the criteria derived from previous IR35 cases and employment tribunals to determine your employment status. Therefore HMRC and The Courts may well have a different view - HMRC will likely be biased towards classing every contractor as employed, however The Courts will be impartial - or should be. Because of the complexity of the criteria it's also possible that 2 different judges could form different 'views' of your employment status so it is a lottery to say the least. If you challenge your IR35 status and lose, you end up paying the costs of the appeal as well as the additional tax & NICs, so HMRC may well look to capitalise on the fact that only individuals who are 100% certain they are outside IR35 will challenge their 'view'.

[meridian]

If you have income, you should pay social contributions on it. No ifs or buts. That's fair.

The income (e.g. a pension or dividend income) has NOT had tax paid on it already. It may well be that the income comes from savings that themselves come from previous income that itself was taxed at the time, but no way does that mean that this current income is already taxed.

So yes, it is fair to tax dividends. And pensions.

No, dividend income comes from investment in a company, not savings (although that investment may have been purchased with savings). Dividend income comes with a tax credit to show the amount of tax already paid on the distribution of earnings to shareholders. The difference is passive income vs earned income, hence the lower tax rate for dividends. The lower tax rate is also meant to encourage investment.

You seem to be interpreting "fair" as applying the same tax to all earnings, regardless of who they belong to or where they come from. That leads down the slippery slope of applying NICs to interest received, capital gains, etc

If it were fair to apply the same tax to all earnings, then why not the same tax rate as well? Surely that would be just as "fair"? I'd possibly even increase my salary if I knew I wasn't going to be taxed disproportionately more.

[Tarquin Farquhar]

You seem to be interpreting "fair" as applying the same tax to all earnings, regardless of who they belong to or where they come from. That leads down the slippery slope of applying NICs to interest received, capital gains, etc

Absolutely. It's not a slippery slope, its only justice. You receive income = you pay. Simples.

And get rid of the stupid upper earnings limit on NICs. It is ridiculous that someone on half a million a year pays a lower rate of NI than I do.

[lje]

I would be happy to pay employee's NI on all of my income but I view it as unfair that I would also have to pay employer's NI.

[ASB]

If you have income, you should pay social contributions on it. No ifs or buts. That's fair.

The income (e.g. a pension or dividend income) has NOT had tax paid on it already. It may well be that the income comes from savings that themselves come from previous income that itself was taxed at the time, but no way does that mean that this current income is already taxed.

So yes, it is fair to tax dividends. And pensions.

Well, I do actually largely agree with you.

To say dividends are untaxed is simply untrue. They are not a chargeable expense. Corporation tax has already been paid on dividends - and I think you'll find it's normally at a rate of rather more than 20%. By overall value most dividends are obviously paid by companies which pay the higher rate of CT.

In compensation for this recipients are treated as having paid basic rate tax - if they don't pay it they cant reclaim it. If they are higher rate payers they are asked to pay more.

Pensions - save for the 25% tax free lump sum - are simply taxable income and assessed accordingly.

I don't see that it is "fair" to level taxes on unearned income at all. In many ways it's fundamentally unfair - though it is the system we have. In order to generate that income post tax income from somewhere at some point is required. A choice is made to invest or save it for ones own benefit - and also to a certain extent the social good. To provide working capital for companies - by investment or borrowing. This generates profits for the middle men - e.g. banks who of course pay taxes on the income that generates (at least in theory).

As a matter of social policy this - and many prior governments - have introduced measures which recognise this is perhaps a bit unfair. Hence various methods of savings which produce returns outside the tax net.

The fact is our (and probably most other) taxation system are a mess. It is reasonable that income from whatever source is taxed, it is reasonable that income which goes towards providing social benefits amongst other things should have social dues (e.g. NI) charged. Fairness works both ways. If there is no possible benefit from the charges levied then that is plainly unfair (e.g. NI on dividends in most cases).

Save for the fact of government sponsored tax breaks for certain sorts of income generating asset and the implicit double taxation (the same income effectively taxed simultaneous twice) on dividend income then this is largely the system we do actually have.

[Tarquin Farquhar]

The fact is our (and probably most other) taxation system are a mess. It is reasonable that income from whatever source is taxed, it is reasonable that income which goes towards providing social benefits amongst other things should have social dues (e.g. NI) charged. Fairness works both ways. If there is no possible benefit from the charges levied then that is plainly unfair (e.g. NI on dividends in most cases).

Agree that the tax system is a mess. So many exceptions, and little chance of changing anything except to make more special cases.

I do see NI as a tax, not a charge. The days when it was a form of insurance have long gone. As insurance, it would be right to charge it only on those who might effectively be insured; as a tax, it should be levied on all income, like any other income tax. Or ideally merged into general taxation, which is what was supposed to happen with the Unified Tax System in 1971, but the Tories bottled it.

I agree with you about dividends. A consequence of that is that contractors like us should in general not be having our Ltd Cos pay us dividends, because for most of us it is really income resulting from the work that we do, not profit resulting from having invested funds in a company. But rather than attempt to ban it (IR35) I would prefer to make this form of evasion redundant (no escape from NI).

[AnthonyQuinn]

Absolutely. It's not a slippery slope, its only justice. You receive income = you pay. Simples.

And get rid of the stupid upper earnings limit on NICs. It is ridiculous that someone on half a million a year pays a lower rate of NI than I do.

Its difficult to say FAIR. Sound much like Alistair Darling. Why is it FAIR that people, provided with the same opportunity to start with, should pay for the upbringing of children of single parents? Or to bail the government out of the hole it has gotten into?

There are several people (not me) who make over 150000 a year who havent got a penny from the government to set up their businesses. Even though it excludes me, it still makes me furious that Darling could say that its FAIR for them to pay 52% to the government.

The more correct term would be, its the LAW. The government is akin to a mafia and will do what pleases the majority. You pay protection money to be able to do honest business here. Simple.

[Tarquin Farquhar]

Its difficult to say FAIR. Sound much like Alistair Darling. Why is it FAIR that people, provided with the same opportunity to start with, should pay for the upbringing of children of single parents?

On the contrary, it is quite easy to say that is fair. They need it, you can afford it, why would you say it is not fair to help those in need?

What on earth would be "fair" about rich people keeping all of their wealth when other people are in need? That is unfair. And it's not hard to say so.

OTOH if you think there is no such thing as fairness, you are, I am sorry to say, being either so selfish or so stupid that you have rather forfeited the right to object to a fair system. Just shut up and pay up, in other words.