Tag Archive | "Family Business Tax"

Economics 101…

The discussion about the Office of Tax Simplification is gaining momentum as the body itself starts to get fully organised. A fair range of interested parties have been discussing how they want to see things change. Naturally, for those of us who have lived with it for eleven years, a lot of this discussion has been about IR35.

Actually that is a little lopsided: there are many aspects of the tax system that need to be looked at, such as the hundred or more tax releifs you can claim for depending on your income, outgoings and inside leg measurement. However, IR35 is an obvious target, being both ridiculous and onerous in roughly equal measure.

But can I point out that much of that debate is starting from entirely the wrong premise?

Ostensibly IR35 is about ensuring an individual can’t reduce their tax liability by channelling their earnings through a different commercial vehicle and by not being employed by anyone. For example, if you have a company that has made a handsome £700 million net profit, you could potentially pay a £1.2 billion dividend to your Monaco-resident 100% shareholding other half. Leaving aside the minor detail of how you pay a dividend that represents 130% of your net profit, the point is you pay no tax at all on your personal income, perfectly legally. I mean, how ridiculous is that?

Oh, hang on a minute….

OK, so that’s an extreme case but if you think about it, Mr Green actually has a glimmering of a valid argument in his apparently specious assertion that paying lots of tax through his company somehow compensates for his not paying any tax at all on his beer and skittles money – or at least, nowhere near as much as a Brownian economist might think he owes.

My point is that most, if not all of the IR35 debate is about how to level the tax paid by a small business owner compared to an employee doing much the same job. The answer is actually blindingly obvious: the employee needs to pay more taxes to catch up.

Say what?

Think about it. Assume an individual with a not unreasonable potential income of £75k, either as salary or as net profits from their business. And, for the sake of argument, we’ll assume that none of that money is going to be ploughed back into the business for growth or protection against future gaps in earnings.

An employee would pay roughly 39% in tax and a company owner using the minimum salary and dividends option would pay a mere 26%. Clearly unfair chaps, come on, play the game.

But – and I think it’s quite a big but – look at the actual numbers. Against that income, the employee would pay £29,250 in tax. The company owner, however, would pay £32,625. That’s £33,75 more than the employee does.


It’s because the company owner would also have generated £13,125 in VAT (or £15,000 from January 2011 if you want to be really pedantic, which makes the gap even wider). And since it’s all about income for the Exchequer, the only possible conclusion is that to achieve a level playing field, personal taxation for employees needs to go up by some 13% to ensure they are providing the same level of tax income as the business owner.

Unfortunately I don’t think that is on Mr Osborne’s radar.

Anyhow, I’ve said it before and I’ll say it again; if I’m a tax avoider I’m clearly a very bad one. It really is about time we forgot all about Labour’s stupid notions of fairness and applied a bit of objective thinking to the whole debate. We money-grabbing contractors may take home more than many employees, but we do so by taking much greater risks with our income than an equivalent employee. At the same time we put a lot more back in to the economy.

And after eleven years of IR35, it would really be nice if people began to understand what it is they’re talking about.

Alan Watts can found at LinkedIn.
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Why I dislike this government quite so much…

So our Beloved Leader has finally allowed us an election. Good news on several fronts. I make no secret of my desire to see the end of the current Parliament in general and our sitting PM in particular. But before we all get drowned in claim and counter claim about who is best suited to lead us out of the crisis we find ourselves in, I thought I might just remind people why I, as a humble one-man-band contractor, dislike this government quite so much.

Firstly, the iniquitous IR35. Brought in by someone who refused to pay a legally imposed tax to address a problem that didn’t exist and so badly framed only a court could decide if it applied to you or not. So you buy insurances and pay for contract reviews and live in uncertainty, or you go use an umbrella and pay a load of taxes you almost certainly don’t actually owe. Meant to bring in £400m a year, it actually generates around £1.5m. Brilliant work chaps.

Then they killed off MSCs. Not a thing that bothered me, to be honest, but I know of people who were trading perfectly correctly through them who had to shift to a different model.

Then we had the Arctic case, trying to apply the clearly defined S660a legislation to a situation it was never meant to cover and which, in fact, was positively endorsed in the House (by a Tory chancellor as it happens…).

Then when they lost that one they immediately produced the fully-formed Family Business Tax (or Income Splitting, as they termed it). That has never actually gone away, but at least the lobbyists were able to demonstrate just how poorly thought out and generally unworkably ridiculous the whole idea was. So that never saw the light of day, thank God and the PCG. The latest one is the Agency Workers Directive, another piece of EU-inspired nonsense that has a genuine purpose at heart but once again is so badly enacted you still won’t know for certain if it applies to you.

And underpinning that catalogue on ineptitude is the constant failure to distinguish between avoidance and evasion (hint: only one of them is illegal, Gordon), the joyous embracing of selling our IT industry abroad by failing to manage the abuse of the ICT system, the wholly unacceptable retrospective change behind BN66 and a raft of smaller but equally rubbish rules and regulations that blight your working life.

So all in all, I hope never again to hear a dour Scots voice telling me all this grief is in the interests of fairness. It isn’t, it’s in the interests of a discredited socialist agenda that’s wrecked the country and cost me a lot of money for no benefit whatsoever.

So farewell, New Labour. Whoever or whatever replaces you, at least the only possible direction is upwards.

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Beaten to it!

I suppose I should also be writing about the PCG’s announcement of the Tory’s proposal for an Office of Tax Sensibilisation, or whatever it’s going to be called, and the fighting chance that we will eventually get rid of the dead hand of IR35. But since a few thousand people have already done that one, I’ll have to think of something else…

Of course this is all a bit dependent on two things; that the Tories win the next election and that they keep their promises. It is perhaps a measure of the low opinion we now have of most MPs that this latter is even a consideration. Having read the letter from the Tories to the PCG, even if they don’t stop IR35 they are certainly making all the right noises about actually supporting small businesses. As opposed to saying you will then bringing in IR35 and re-interpreting S660a and threatening the Family Business Tax.
And following last week’s changes to the ICT rules, this is further vindication of the PCG’s growing stature and maturity. Long may it continue!

Back in the land of the client, we’ve been having fun and games with Procurement again. The rules are perfectly clear, I have to agree. Clear, that is, until you try and apply them to the real world. Then it all goes a bit strange. I can see why you should get comparative quotes for things, but if there’s only one approved supplier anyway, how does that help? Seems I need to fill out a non-competition form to explain why there’s only one supplier. Reason I gave was that it was their invention we were trying to buy and they haven’t let anybody else at it yet. Wonder if that will work.

And then we had a slight organisational hiccup, when we ran out of 40 time-based licences and some key users – like the CEO, for example – couldn’t access a major system. No problem with quotes there, it’s a straight replacement. So I rang the supplier, called in a few favours and asked if they could possible take 3 weeks 6 days of the four week delivery time. “No problem”, they said, “Get me an order”. Great. So rushed through the PO raising process – another labyrinth – got it approved and that was it. Next morning, a message from the supplier; the order didn’t turn up which means we lose at least a day on delivery. So what happened, I asked Procurement “Takes two days to process an order, I’m afraid”….

Just before I told them what I thought of their system, I had the wit to ask for the order number, which they gave me – probably by mistake, of course. So the order is back on track and disaster averted.

So never mind the Tories simplifying tax. Some people’s business processes need a good seeing to first.

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