Whilst remarks in the recent pre-Budget report could spell the end of a significant tax advantage enjoyed by the self-employed who have incorporated, tax experts believe it could lead the way towards the elimination of the much-maligned IR35 rules.
According to paragraph 5.91 of the report (which was barely mentioned by Chancellor Gordon Brown in his parliamentary statement), the government is to “bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company."
However, whilst this will almost inevitably mean that owner-managers will be paying more tax, it may also lead to the welcome demise of IR35 rules, the bane of many a freelancer's life.
"I could see this as a win/spin for the Chancellor to introduce targeted legislation that discourages the extraction of earnings as dividends from small incorporated businesses such that there would be no need for IR35 to remain on the books,” observed Mark Lee of tax advisors WJB Chiltern, in an interview with AccountingWEB.
"It would hardly help small businesses because it would increase the tax revenue from them, but could be presented as a simplification measure and a sign that the Chancellor had listened to representations on the discriminatory aspects of IR35," he added.
According to AccountingWEB, many in the profession are leaning towards the view that Brown will jettison IR35 in favour of imposing National Insurance contributions on dividend income. A possible alternative would be the removal of tax credits on dividends paid to owner-managers.
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