Introduction
IR591 has turned out to be a bit of a damp squib. IR35 has not been abolished, and there is large tax bombshell.
The Budget Statement
The final release was in paragraph 5.93 (Page 22) in Section 5 'Building a Fairer Society'.
"The government is therefore concerned about the increasing numbers of self-employed individuals adopting the corporate legal form where the change is made for tax reasons rather than as a step to growth, often as a result of marketed tax-avoidance schemes. Following the announcement in the 2003 Pre-Budget Report, the Government has reviewed options for more closely aligning the tax paid by these individuals with their economic characteristics. Having considered a range of options, the Government is determined to proceed in a way that protects the benefits of low tax rates for those investing in their businesses. With effect from 1 April 2004, the Government will therefore introduce a 19 per cent minimum rate of corporation tax on distributed profits. This measure will ensure that corporate tax rates lower than 19 per cent, including the zero rate of corporation tax introduced in April 2002, remain available to small companies as they re-invest in their business. Businesses re-investing their profits, or companies with taxable profits above £50,000, will be unaffected by this measure."
How Does This Affect Contractors?
On the surface it could appear to be somewhat catastropic, but in actual fact the measures are insignificant to the vast majority of contractors.
The measures mean that if the company has profits less than £50,000 and distributes the profits (takes dividends) then effectively the zero percent tax rate is taken away and replaced with a 19% per cent rate.
A contractor earning more than £43 per hour is most likely to have distributable profits above £50,000.
If the profits are not distributed but reinvested in the company then there is no further tax to pay.
The actual calculations show that those contractors whose profits are closer to £10,000 will be more affected than those closer to £50,000. This is due to the marginal tax rates.
We wil publish some examples later in the week.
What Happened To IR35?
Despite rumours that it would be abolished, it was not even mentioned.
IR35 has NOT been abolished and is here to stay.
Our Comment
The measures today show the Chancellor to be fair. He introduced the zero rate in 2002 to help small business growth. Unfortunately many used that opportunity and abused the tax loophole, which has now been closed.