Reply to: How workers across UK become 'companies' to cut tax rate to 20% - This Is Money

[Batcher]

Probably not but it raises a lot of questions and draws bad publicity to those of use who are legitimate businesses.

Of most concern in the article is



Questions such as why is a publicly funded organisation allowed to behave in this way and why are similar questions not being asked about the way extremely large multinationals structure their affairs as to make a small profit or even a loss for many years in succession simply to avoid paying corporation tax are arguably more important.

Probably because Margaret Hodge and her cronies are friends with one and still rankled over the other because IR35 fizzled effectively (except of course as a deterrent, but it doesn't seem to deter the Beeb much)

It always amuses me when Margaret Hodge gets on her high horse about companies not paying their fair share of tax when her family's firm is known to avoid tax like the best of them.

Margaret Hodge's family company pays just 0.01pc tax on £2.1bn of business generated in the UK - Telegraph

Speaking to The Daily Telegraph, Mrs Hodge defended Stemcor’s behaviour and said that the company had “assured” her it paid “every penny of tax that is owed”, adding that she was only “a very small shareholder”.

“Clearly, I have asked them the question,” said Mrs Hodge. “They have always promised that they do absolutely nothing to avoid tax. I would be very mad if I found out differently.”

Mrs Hodge said unlike other companies under the spotlight, Stemcor did not try to shield profits or “hide information” and that was the difference between Stemcor and Starbucks.

However, when pressed about the details of why so little tax was paid by Stemcor despite the billions of pounds it makes, Ms Hodge said that she had not done “enough detailed work” and did not have the information.

[tractor]

...

OT pensions. That industry has done a remarkably good job in explaining the tax saved. It is true. At the point of contribution.

For most people ultimately a pension will provide a modest tax saving (solely because of the 25% lump sum - which is always under threat). In reality, on the rest of it it usually provides for simple deferment. The output from the pension is taxable.

Certainly there are cases where the tax saving can be significant (and - depending upon circumstances the NI saving is definitely significant) but for the average joe chucking a few hundred in a month the tax savings will mainly turn out to be an overall illusion.

I'm not in anyway against pensions, but the taxation consequence are far from as simple as "hey I effctively get this lot tax free".

Yes, but it's the NI issue which is seen as the biggest dodge. In that respect, a pension is no different to any other 'dodge'. It's just more prudent for governments to encourage people to save because it means they are less of a drain following retirement if they don't.

[Zero Liability]

Although we all know what it means.

We all know what HMRC would like it to mean.*

[PerfectStorm]

Although we all know what it means.

[eek]

Sadly, the politicians have no issue with the wording, though.



(Linky - see page 315)

That's fine as its not defined in law and therefore my company cannot meet the definition of it.

[TheFaQQer]

Please stop talking about PSCs there is no definition of a PSC in tax or any other law. It was a phrase dreamed up by NL and HMRC to define a section of business that they wanted to treat differently. To be fair there were lots of examples that did need addressing, not least the BBC itself and even more recently, other government departments and their creative accounting.

Sadly, the politicians have no issue with the wording, though.

Chris Bryce (PCG CEO): PCG members generally operate through their own limited companies. Like Mr Ramsden, PCG has some difficulty with the term “personal service company”.
Baroness Noakes (Conservative, Chairman): It is a term that is much used, so I am afraid we are going to carry on using it.
Chris Bryce: It is indeed...

(Linky - see page 315)

[tractor]

...

Please stop talking about PSCs there is no definition of a PSC in tax or any other law. It was a phrase dreamed up by NL and HMRC to define a section of business that they wanted to treat differently. To be fair there were lots of examples that did need addressing, not least the BBC itself and even more recently, other government departments and their creative accounting.

[eek]

so the next drip drip from HMRC has arrived. Next will be the FTC company type (finance bill after the election) and the HMRC agency reporting regulations which will mandate the reporting of all payments from an agency to a worker / company directly...

Of course there is nothing to see here because IPSE have negotiated an opt out

[Craig at Nixon Williams]

This is a sensationalist article, written by the Daily Mail – not an organisation that I would look to when making financial decisions. In their example they compare a salaried employee earning £100k with a PSC with a turnover of £100k – according to this the only tax paid by the PSC would be £20k in Corporation Tax and that the remaining £80k is untaxed, obviously they do not understand the entire picture.

Here's a question. Is there anywhere 'official' (i.e. HMRC published) that states that the contractor method of payment - basic allowance salary + dividends - is wholly and morally legit?

Or is it going to remain a more Jimmy Carr-style "I was told I could save tax legally, I now know this is wrong..." affair?

Or is the answer "it depends on your IR35 status"?

IR35 is essentially where the line is drawn with HMRC - the goal of IR35 is to ensure that people who would be an employee in the absence of the PSC pay tax as if they were an employee (whether this is achieved or not is a different discussion).

Politicians and the media seem to distort the line between tax avoidance and tax evasion –I guess that politicians will hope that this will in some way boost revenues to the exchequer as it will put doubt in the minds of many people.

[VectraMan]

As I said, the biggest advantage is not a direct tax saving, but tax planning and flexibility.

Contrast with a sole trader who gets tax on all of their profits in a year regardless of how much they actually need to live on.

I'd be happy to see a middle ground: keep the ability to pay tax only on what you pay yourself when you pay it (and so have the tax planning and flexibility), but do away with the NI saving so you pay the same amount of tax as everyone else. I.e. recognise that you're a business.

[TheFaQQer]

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

No.

Year 1-5 take little salary or dividend. Year 6, shutd own the company and go and do something else with no intention to return contracting, so you take the ER at 10% instead.

Or year 1 take money up to the higher rate threshold. Year 2, work for three months and use retained profit to pay dividends and salary up to the higher rate threshold.

Etc.

[TheCyclingProgrammer]

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

As jmo says, they may all come out at basic rate if you run out of work and need to dig into your war chest.

Or you might call it a day and extract your retained profit at a very appealing rate of 10% as a capital gain, assuming you qualify for ER.

But yes, in most cases, some of that profit is going to have to come out at a higher rate eventually if you need the money for something (eg I recently took a larger dividend to cover a house purchase deposit which means higher rate tax to pay).

As I said, the biggest advantage is not a direct tax saving, but tax planning and flexibility.

Contrast with a sole trader who gets tax on all of their profits in a year regardless of how much they actually need to live on.

[jmo21]

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

Year 1 - work all year, rake in all the cash into company account. Pay small salary, all qualifying expenses, pay divvies up to upper threshold.

Year 2 - do not work at all, company uses retained profit from last year to pay small salary, all qualifying expenses, and divvies to upper threshold.

That's the most extreme example, and obviously misses out a few things, and not many will do it that way, but you get the idea.

[PerfectStorm]

Very misleading as it suggests that Ltd co. contractors half their tax bills.

Corporation tax small business rate is 20%. Basic rate of income tax is the same. The main saving, up to the higher rate threshold, is on national insurance.

If you wanted to extract all of your net profit as dividends, then you're going to get taxed on 25% of your net dividends which, on top of the corporation tax equates to 40% of your gross profit before tax, again the same as higher rate income tax. So you're still only saving on NI.

Of course, the biggest advantage, tax-wise, is the ability to manage how much you pay more effectively, i.e. by only taking a small wage and dividends up to the higher rate threshold, assuming thats all you need to live on. There's also the potential advantage of ER on a capital distribution on winding up and sharing profit with a spouse or partner. But generally, if you need more money, you're going to pay almost as much in tax.

But surely you have to take the profits out as dividends sooner or later... so they're always going to be taxed the same whether you take them out every month as they come or at a later date?

[TheCyclingProgrammer]

Very misleading as it suggests that Ltd co. contractors half their tax bills.

Corporation tax small business rate is 20%. Basic rate of income tax is the same. The main saving, up to the higher rate threshold, is on national insurance.

If you wanted to extract all of your net profit as dividends, then you're going to get taxed on 25% of your net dividends which, on top of the corporation tax equates to 40% of your gross profit before tax, again the same as higher rate income tax. So you're still only saving on NI.

Of course, the biggest advantage, tax-wise, is the ability to manage how much you pay more effectively, i.e. by only taking a small wage and dividends up to the higher rate threshold, assuming thats all you need to live on. There's also the potential advantage of ER on a capital distribution on winding up and sharing profit with a spouse or partner. But generally, if you need more money, you're going to pay almost as much in tax.