OTS recommended changes to IR35

[Nixon Williams]

Small business tax review to duck IR35 - Telegraph

This seems to be an early preview of the Office of Tax Simplification (OTS) due to be issued tomorrow (9th March).

[malvolio]

Small business tax review to duck IR35 - Telegraph

This seems to be an early preview of the Office of Tax Simplification (OTS) due to be issued tomorrow (9th March).

But, if HMG takes on the plan on merging NICs and PAYE, IR35 is then unnecessary. In which case it could be killed off right away.

They wouldn't be that brave, would they?

[SorenLorensen]

But, if HMG takes on the plan on merging NICs and PAYE, IR35 is then unnecessary.

Can you explain how IR35 would be unnecessary with that plan? What about dividends etc, that are not taxed as part of PAYE?

[Nixon Williams]

Can you explain how IR35 would be unnecessary with that plan? What about dividends etc, that are not taxed as part of PAYE?

Yes dividends are taxed but NOT via PAYE.

Dividends are deemed to be fully taxed upto the higher rate threshold (£42,475 for 2011/12) at the rate of 10%, so there is no further tax to pay if your total gross income will not exceed this.

The higher rate tax on dividends is 32.5% and 42.5% if your gross income exceeds £150,000

So, if the Chancellor does merge tax and NIC, extra tax will only be collected IF he raises the higher rate tax on dividends, to say 40% & 50%.

Remember the 10% tax credit so the effective current higher rate on gross dividends is 22.5% (32.5-10) and 32.5% (42.5-10).

We may know more tomorrow and of course on Budget day on 23rd March.

Alan

[Wanderer]

Can you explain how IR35 would be unnecessary with that plan? What about dividends etc, that are not taxed as part of PAYE?

There is currently no NI on dividends, so presumably if they merge PAYE and NI then we would end up paying an extra 10% or so NI on the dividend income we take.

Not sure why malvolio would applaud that though.

[SueEllen]

A few problems with merging Tax and NIC, and dividends being taxed the same rate as income -

1. You will have to write special tax rules so that any company you work in that you are a major shareholder in, your dividends would be taxed as income. Otherwise there would be no point to employee share schemes or people who work having shares in any company in general. Writing even more tax rules would probably create another tax loophole plus you can argue it deters entrepreneurs.

2. NIC is a social tax. EU countries have a social tax and an income tax. Due to how the current rules work across the EU you can pay social tax in one country i.e. your country of main residence but income tax in the country you are working in temporarily. Merging the two means that the UK will be out of alignment with the rest of the EU and this would cause problems.

[Nixon Williams]

There is currently no NI on dividends, so presumably if they merge PAYE and NI then we would end up paying an extra 10% or so NI on the dividend income we take.

Not sure why malvolio would applaud that though.

You would only pay more tax IF the tax rate on dividends was increased, so they could have a merge "new" basic tax rate of 32% (20% tax + 12% NIC) but unless the tax on dividends was increased, no extra tax would be due.

Dividends are NOT taxed via PAYE - do not confuse PAYE (the method of collecting income tax via the payroll) and income tax ( a tax on all income whether it is salary, interest or dividends etc).

My guess is that if tax and NIC was merged the tax on dividends would increase but probably not as much at the 12% NIC rate.

Alan

[malvolio]

There is currently no NI on dividends, so presumably if they merge PAYE and NI then we would end up paying an extra 10% or so NI on the dividend income we take.

Not sure why malvolio would applaud that though.

I think the numbers would bew way more complicated than that, as Alan has said, plus issues with things like ErNICs and pensioners who don't pay them at all. But if there is no discrete NIC then there is no benefit in using a limited company to take dividends to avoid them so there is no more need for IR35 (not that there ever was, but you know what I mean).

[xoggoth]

Eh?? So if tax neutral change, the total average combined tax rate would be current tax rate + current employee's NI rate (+ current employer's NI rate?) Way above current dividend rate, so how is IR35, which requires payment as salary which would be taxable at this new high rate , irrelevant?

[ratewhore]

If this is the case then what are the benefits of Ltd Co over self employed? If I have insurance to cover the increased liability I can have all my turnover sitting there offset against my mortgage.

Maybe I'm missing something as this is an off the cuff response...