22 08 2016

£2,000 hit for contractors who use limited companies to pay less tax

Self-employed contractors will pay an additional £2,000 in tax for an £80,000 contract under new dividend tax rules introduced in last week’s Budget.

Most contractors, including personal service companies, work through a limited company and take the bulk of their income through dividends, which is more tax efficient than taking a large salary.

Graham Webber, of tax specialist WTT Consulting, said a contractor who bills their client £80,000 will pay an additional 2.5pc – or £2,000 – in tax after the dividend tax rise.

If the contractor charges £160,000, the tax bill will rise 3pc, adding £4,800 overall.

Chancellor George Osborne announced last week that the dividend tax will rise from April next year.

While basic-rate taxpayers do not pay any tax on dividends currently, under the new rules only the first £5,000 of dividend income a year will be exempt.

For dividend income above this allowance, basic-rate taxpayers will pay 7.5pc, while higher-rate taxpayers will pay 32.5pc tax, up from 25pc. Those who pay the additional rate of 45pc will see their dividend tax rate rise from 30.5pc to 38.1pc.

Mr Webber said of the £6.8bn that the Treasury expects to raise through the changes, around £3bn will come from the UK’s estimated 750,000 contractors. He said the remaining amount will be raised from individual share and investment portfolios.

The Government has been cracking down on contractors who incorrectly use personal service companies in recent years.

Many contractors legitimately bill their employers through their personal company. By paying corporation tax at 20pc and taking a modest wage plus dividends from the company, they save on income tax and National Insurance contributions. Some are also able to keep child benefits because their “wage” is under the threshold.

But a large proportion are not technically contractors at all and are doing the job of a normal employee, meaning they are in breach of a tax avoidance rule, called IR35, that says people cannot be “disguised employees” by paying themselves through companies.

Could I set up as a company and slash my tax bill?

The Government announced last week that it will launch a consultation later this year on improving the effectiveness of IR35.

HM Revenue & Customs has gone to great lengths to boost its enforcement of the IR35 rule. It has set up specialist teams to investigate possible breaches and imposes penalties of up to 100pc of the tax due.

In March two government departments were fined and 100 NHS bosses and civil servants were fired after the Treasury discovered that staff were being paid “off the books” through private companies.

The BBC has also come under fire for paying some of its top stars including Fiona Bruce and Jeremy Paxman as contractors.
http://www.telegraph.co.uk/
[10:14:30] Ira Kudryavtseva: US
4 Ways Congress Can Lead on Tax Reform

Even more than most presidential election years, almost all press and public attention is focused on the top of the ticket. One thing both candidates are talking about this year is tax reform. Republican presidential nominee Donald Trump gave a speech earlier this week outlining a new tax reform plan that significantly changes some of his previous proposals. Meanwhile, former Secretary of State and Democratic nominee Hillary Clinton continues to add details to her reform proposals. As I have noted before, almost everyone agrees on the need for comprehensive tax reform – it is one of the few areas of consensus on the political landscape. But leaving aside the substance, what will it take for that consensus to lead to action?

The short answer is that Congress will have to take a leadership role along with the next president to bring about meaningful reform. Without Congress, presidential tax reform plans are political documents – useful in telling us where a candidate stands in the broadest terms, but meaningless in the sense that they don't tell us how changes will actually be paid for and how they will affect the long term deficit and debt. And no matter how detailed an outline, things don't get serious until a lawmaker actually puts a proposal into legislation and receives a budget score from the Joint Committee on Taxation and the Congressional Budget Office.

Leadership in Congress means more than each party articulating its vision based on core values. The blueprint for reform recently released by House Ways and Means Committee Chairman Kevin Brady, R-Texas, along with the principles articulated by ranking member Rep. Sander Levin, D-Mich., are useful, serious work. But the only way to move forward on tax reform is to cobble together some unusual, bipartisan alliances and to start making deals. Because Congress has been working diligently for five years now, we know there are some areas of agreement that can be used as a starting point, including:

Reviewing the whole tax code and eliminating the longstanding practice of so-called tax-extenders. The so-called Taxibus omnibus spending bill enacted last December both repeated the longstanding practice of enacting short term extensions for several special interest provisions and for the first time made permanent several other provisions. But this concept that certain tax expenditures can be renewed repeatedly masks their true cost and dampens the appetite for the more difficult but needed comprehensive reform. Predictability is an important element of taxes. Individuals and companies need it to make rational spending decisions and lawmakers need it to know the cost of policies. Both sides of the aisle should agree to stop this practice.

Crafting a tax reform proposal that is pro-growth and encourages more American jobs. Simply saying that a proposal is pro-growth is not enough; corporate tax reform should neither pick winners and losers nor reward companies that hide income and move operations overseas. That means we need a simpler, fairer, flatter corporate tax code that doesn't allocate preferences based on political power.

Thinking big and considering all creative and productive ideas for raising revenue. This requires being honest in calculating the revenue raised or reduced in tax reform and the changes taxpayers would experience. Dynamic scoring of tax proposals – calculating additional revenues generated from economic activity stimulated by tax cuts – is now considered along with static scoring. But Congressional Budget Office Director Keith Hall, who was put in place because he believed in dynamic scoring, says the evidence shows that "tax cuts do not pay for themselves.'' So, we need to be clear-eyed about the impact of reform. The national debt now exceeds $19 trillion, and deficits are predicted to grow ever larger in the future. Several proposals in Congress and in the presidential primary season contemplated consumption taxes – either in the form of a value added tax, a carbon tax or even a national sales tax. No idea should be rejected out of hand – but every idea must be subject to rigorous scoring and scrutiny.

Doing the hard work in Congress that will lead a wealth of choices. Looking at the revenue raised by making certain changes while also reviewing the broader fiscal picture, including spending and entitlement reform.

Whatever the outcome of the presidential election, Congress has the power to pass a comprehensive tax reform bill. We hope voters will ask congressional candidates how each will support reform and help stabilize and reduce our long-term debt, make a difference for taxpayers and put the country on a stronger fiscal path.