UK Treasury Said To Be Lining Up IR35's Replacement

by Jason Gorringe, Tax-News.com, London

21 January 2004

According to recent reports, the UK government is set to abolish the unpopular IR35 tax rules in April of this year, replacing the system with a new set of rules which have been dubbed ‘IR591’.

Reflecting the paragraph in Chancellor Gordon Brown’s pre-Budget report last year that pledged to ensure small businesses will “pay the right amount of tax,” it is thought IR591 will apply to all close companies paying dividends. If applied, this measure would be likely to significantly boost revenues for the government. The IR35 rules were, typically, only applied to workers in the knowledge-based economy, such as self-employed IT contractors.

However, the crucial difference will be that if introduced, IR591 would represent more of a structural change in the taxation system for small businesses, whereas IR35 was introduced as an enforcement measure designed to prevent ‘disguised employees’ gaining tax benefits through dividend income.

Whilst the accounting profession widely believes that Treasury looks certain to amend the IR35 rules, the government itself has yet to confirm or deny that changes are scheduled for April 2004.

Facing questions in the House of Commons on the issue last week, Paymster General Dawn Primarolo reiterated the pre-Budget statement’s pledge to “bring forward proposals,” that will “ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits received from their company, protecting the benefits of low tax rates for the majority of small businesses.”

However, she also hinted that government is working on updating the current rules, revealing: "There is currently no precise definition within current tax legislation of 'owner manager'. This issue is among those being considered by the Government in the context of its announcement in paragraph 5.91 of the 2003 Pre-Budget Report."

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