A new Treasury discussion paper on how the tax system treats the self-employed, to be published alongside the pre-budget report at the end of the year, could result in small businesses and contractors paying more tax, experts fear.
The Treasury announced in March’s budget that the discussion paper will examine “issues raised by the interaction with the tax system of the definitions of income, of self-employment and the remuneration paid to owner managers”, although it has refused to elaborate further on the possible implications that this may have for taxpayers.
However, many tax experts fear that the conclusions of the Treasury paper will inevitably result in the self-employed paying more tax as part of a wider clampdown on the sector.
They point to the 19% corporation tax on the dividends of small incorporated businesses, introduced in last month’s budget, as the first step in a series of new tax measures.
Speaking to The Times this week, Anne Redston, tax partner at Ernst & Young, observed that whilst Chancellor Gordon Brown on the one hand has sought to encourage small owner-businesses with tax breaks, over the last two years, "the economic climate has not been so favourable and he is worried about tax leakage as a result of these measures now”.
Redston added that the government’s motive is probably to narrow the differences in tax treatment between employed and self-employed taxpayers, as the latter generally pay less in National Insurance contributions, and are allowed more scope to deduct expenses from income.
“The feeling about this review is that things are not going to get better for small businesses — only worse,” she predicted.
However, others note that there may be positive elements to the Treasury’s review of the tax system for the self-employed, in that an overhaul of the system may finally create some much sought after stability and allow small firms the ability to make long-term decisions with a greater degree of certainty.
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