OTS recommended changes to IR35

[Jog On]

Maybe the merger of TAX/NI on divis would mean that dividend income up to £42,475 would now be "taxed" with the merged NI as well so instead of being 0% it's actually 11-12%?

That's still a considerable saving vs taking it as PAYE which is what IR35 is there for anyway so i don't see how this makes it obsolete.

I suppose we have to see what actually happens in the budget. If they apply a blanket tax change like this to all businesses there will be quite an uproar and I don't think they want to stifle growth. Or they will come up with a new set of 'tests' which the accountacy and tax advisor professions will find ways to get around and we'll all be back where we started?

Must stop speculating

[dx4100]

If you google for accountancy age they have a few articles on it.

*I would put the link but I don't think I'm suppose to advertise or endorse things.

Found it but can't find anything that mentions Employers National Insurance.

[Emigre]

If you google for accountancy age they have a few articles on it.

*I would put the link but I don't think I'm suppose to advertise or endorse things.

Its a shame they describe IR35 as defining the boundary between the employed and self-employed. Last time I looked IR35 had nothing whatsoever to do with the self-employed. That kind of muddying of the waters is as bad as successive Govts attempts to grey the boundaries between evasion and avoidance.

[Nixon Williams]

So they subject the whole lot to Income Tax + Employees National Insurance. What about Employers National Insurance ?

IF income tax and NIC are merged then it is quite possible (more likely probable) that some sort of employers NIC would remain, although it may be rebranded as something else. The revenue from this is too large for it to be abolished.

It is quite possible (although not probable) that with the merging of income tax and NIC that the tax on dividends does not change. Although dividends are subject to income tax, the rates are not the same as those applicable to salaries (PAYE).

Income tax on salaries starts at 20%, rises to 40% and then the top rate of 50%.

Income tax on dividends starts at 10% (notional amount) rises to 32.5% and then 42.5%.

The actual tax paid (in cash to HMRC) on dividends is zero if you are not a higher rate tax payer, 22.5% if your dividend income exceeds the higher rate threshold, and 32.5% if your income is in excess of £150,000

Remember PAYE (tax deducted from salaries) is not the same as income tax, which the tax applicable to all income including salaries etc.

Alan

[ContractIn]

Maybe the merger of TAX/NI on divis would mean that dividend income up to £42,475 would now be "taxed" with the merged NI as well so instead of being 0% it's actually 11-12%?

That's still a considerable saving vs taking it as PAYE which is what IR35 is there for anyway so i don't see how this makes it obsolete.

I suppose we have to see what actually happens in the budget. If they apply a blanket tax change like this to all businesses there will be quite an uproar and I don't think they want to stifle growth. Or they will come up with a new set of 'tests' which the accountacy and tax advisor professions will find ways to get around and we'll all be back where we started?

Must stop speculating

The report gives them a get out clause and the pessimist in me thinks they will proceed with "Keep IR35 legislation unchanged, but improve the way it is administered by HMRC"

[Nixon Williams]

Perhaps this will explain how dividends are currently taxed. So the Chancellor would have to increase the specific rate of tax on dividends to collect extra revenue, even if income tax and NIC were merged.

Dividends

Provided that the recipient of the dividend is not a higher rate tax payer then no further tax will be due on the dividend. The dividend received would be treated as tax paid.

Higher rate tax payers will be liable for an additional charge on any dividends that exceed the higher rate threshold.

Example

Net Dividend £900 - 90%
Tax Credit £100 - 10%
Gross Dividend £1,000 - 100%

Basic rate and non-taxpayers will receive £900 with tax fully paid – there is no further liability.

Higher Rate Taxpayers will be liable for additional tax as follows:

Gross Dividend £1,000
Tax @ 32.5% £325
Less Tax Credit £100

Net Additional Tax Due £225 (=25% of net dividend)
Net Dividend after tax £675 (=75% of net dividend)

If your gross taxable income exceeds £150,000 then a 10% Additional Rate of tax is due on this excess, so dividend
income in excess of £150,000 will be taxed at 42.5%.

Alan

[dx4100]

IF income tax and NIC are merged then it is quite possible (more likely probable) that some sort of employers NIC would remain, although it may be rebranded as something else. The revenue from this is too large for it to be abolished.

It is quite possible (although not probable) that with the merging of income tax and NIC that the tax on dividends does not change. Although dividends are subject to income tax, the rates are not the same as those applicable to salaries (PAYE).

Income tax on salaries starts at 20%, rises to 40% and then the top rate of 50%.

Income tax on dividends starts at 10% (notional amount) rises to 32.5% and then 42.5%.

The actual tax paid (in cash to HMRC) on dividends is zero if you are not a higher rate tax payer, 22.5% if your dividend income exceeds the higher rate threshold, and 32.5% if your income is in excess of £150,000

Remember PAYE (tax deducted from salaries) is not the same as income tax, which the tax applicable to all income including salaries etc.

Alan

Maybe I am missing something but if they merge the two taxes and then still make us payout Employers NIC (by whatever name it becomes) then that is basically just making us all IR35 caught ?

GULP...

I must be missing something...

[Jog On]

The report gives them a get out clause and the pessimist in me thinks they will proceed with "Keep IR35 legislation unchanged, but improve the way it is administered by HMRC"

That just means more cat & mouse and 'uncertainty'. It will just (IMO) raise the bar for the tax advisor/accounting profession which from what I can see they are also trying to do away with (not acountancies obviously but tax advisors and dodgy brollies/schemes etc).

Then there's the set of tests suggested by the business directors with questions like "What % of your turnover do you take as salary/dividends?" I don't see any relevance in this question though - it's like asking Philip Green "What % of your wealth is held offshore and what % of it is generated in this country?" So what?

If they do implement this I hope they also ask questions like:

"How much of your hourly/daily rate do you get paid by your employer if you are off sick?"

"How much of your hourly/daily rate do you get paid by your employer if you cannot get into work because of snow?"

"How much of your hourly/daily rate do you get paid by your employer if you go on holiday?"

"How many working days on average have you had on the bench over the last year and how much did you get paid by your employer for not being employed by them?"

I hope they see sense and just let us get on with it. We are a pretty vital part of the economy and recovery are we not?

[Nixon Williams]

Maybe I am missing something but if they merge the two taxes and then still make us payout Employers NIC (by whatever name it becomes) then that is basically just making us all IR35 caught ?

GULP...

I must be missing something...

I think you are missing something.

You would be right IF the tax on dividends increased by the NIC rate, so if the higher rate tax on dividends increased to say 44.5% and 54.5% on income over £150,000 but that is a big IF!

My guess is that there may be some movement in the tax rates on dividends but the government need to be wary of people who receive dividends who are not subject to NIC such as pensioners, they will not want to make them pay more tax expecially as they tend to be vocal and vote!

Alan

[Wanderer]

the pessimist in me thinks they will proceed with "Keep IR35 legislation unchanged, but improve the way it is administered by HMRC"

Me too.

The best thing about IR35 (from a government point of view) was that the Fear Uncertainty and Doubt scared a bunch of people away from LTD and into IR35 compliance, umbrellas or even permiedom. When anyone challenged IR35, HMRC dragged their heels for years and years and eventually the case was heard, HMRC lost, test cases were there and the correct application of the rules was clear. That's no use to the poor saps who went inside IR35 because they thought it was the right thing to do or just wanted a quiet life. They now know they were over paying tax all along, HMRC's stalling tactics work!

Now they say, "OK IR35 is a pile of tulip, let's fix it". Now they bring in a new system which will take 5 or 6 years to be properly tested. In the mean time, HMRC are benefiting from the FUD surrounding the new system.