4 ms·

That's reasonably easy to explain. It's called 'going after the low hanging fruit'. Here's the problem: very large companies have very expensive accountants. T

That's reasonably easy to explain. It's called 'going after the low hanging fruit'. Here's the problem: very large companies have very expensive accountants. These accountants are quite often ex-HMRC so know tax law very well. They know all the loopholes and how to play the system. They also have a big budget for political 'donations' which those in power don't want to lose. Plus a lot of very expensive lawyers to defend them from charges. All of this makes it much more difficult and expensive to investigate and prosecute large companies for tax dodging. Small companies, on the other hand, are a fruit ripe for the picking. They don't have much money for fancy accountants and lawyers so it is easy to create legislation to make them pay more money and know that they will have to cough up - or face the consequences. The final piece of the puzzle is that a lot of the top MPs have 'Directorship' positions at the big companies, so have an interest in protecting them. Plus a lot of them are taking advantage of tax loopholes themselves, so have a vested interest in not closing them. (Remember Cameron being outed for being in a tax scheme that was legal, but not entirely ethical?)

Silhouette 9y ago
Oh, yes, it's quite clear how it works in the short term. It's just incredibly naive in the longer term, because the alternative for founders of new businesses typically isn't hiring expensive accountants of their own, it's just not bothering at all. Why should anyone risk their savings and give up the security of a well-paid job (which people in a position to start a viable new business very often already have beforehand) if in return you get all the costs and overheads of running a small business to deal with and then the government is going to impose a very high tax rate on the profits as well? If they had imposed a sudden 7.5% increase on the general rate of income tax, they'd have been out of power for a generation.
- pmyteh 9y ago
  To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. I used to be a self-employed consultant. The number of my peers who set up one-man companies, stayed (or claimed to stay) just a whisker outside IR35 and paid themselves in dividends was astonishing. I see no reason why dividends from a company with no fucking capital should be seen as anything other than regular taxable income.
  - Silhouette 9y ago
    To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. Not once you take the already applied corporation tax into account, though. Then the overall tax rate is around 5% above regular income tax, with the exact difference depending on which tax band you're looking at. Of course you can argue that employees also pay NI on PAYE salary, but if you're going to go down that path then really you also have to consider that employees get paid time off, pension contributions, etc. that their employer is footing the bill for. Again that leaves the balance quite heavily in favour of being employed rather than going independent, even if the employer provides only the statutory minimum PTO and pension contributions. Operating through a limited company wasn't particularly cost-effective even before the dividend tax change if you were actually running a real business and taking on the usual costs/overheads/risks of any other business, unless you were able to take advantage of something like Entrepreneur's Relief following an exit (and willing to accept the slightly strange limitations that come with that). Otherwise, it mainly only worked in favour of people like the ones you mentioned, who weren't running a real independent business at all and were simply skirting the law in an effort to abuse the tax system -- effectively, taking most of the perks of being an employee, yet getting the tax advantages of not being one. If the government had any idea what it was doing with the small business sector, it would surely have dumped IR35 and brought in a more suitable replacement to deal with that situation long ago. There was no need to hit all the legitimate businesses as well.
    - fauigerzigerk 9y ago
      >Not once you take the already applied corporation tax into account, though That's right, but you don't have to pay yourself a dividend. If you pay yourself a salary you are taxed exactly the same as any employee. The salary is of course a business expense reducing the corporation tax base. So taxes plus NI contributions paid by regular employees is your upper bound as a business owner as well. The whole dividends question is purely about how much less you pay than regular employees.
      - Silhouette 9y ago

Silhouette 9y ago

Oh, yes, it's quite clear how it works in the short term. It's just incredibly naive in the longer term, because the alternative for founders of new businesses typically isn't hiring expensive accountants of their own, it's just not bothering at all. Why should anyone risk their savings and give up the security of a well-paid job (which people in a position to start a viable new business very often already have beforehand) if in return you get all the costs and overheads of running a small business to deal with and then the government is going to impose a very high tax rate on the profits as well? If they had imposed a sudden 7.5% increase on the general rate of income tax, they'd have been out of power for a generation.

pmyteh 9y ago
To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. I used to be a self-employed consultant. The number of my peers who set up one-man companies, stayed (or claimed to stay) just a whisker outside IR35 and paid themselves in dividends was astonishing. I see no reason why dividends from a company with no fucking capital should be seen as anything other than regular taxable income.
- Silhouette 9y ago
  To be fair, the 'very high tax rate' it's been put up to is still less than income tax levels, so it's still being incentivised. Not once you take the already applied corporation tax into account, though. Then the overall tax rate is around 5% above regular income tax, with the exact difference depending on which tax band you're looking at. Of course you can argue that employees also pay NI on PAYE salary, but if you're going to go down that path then really you also have to consider that employees get paid time off, pension contributions, etc. that their employer is footing the bill for. Again that leaves the balance quite heavily in favour of being employed rather than going independent, even if the employer provides only the statutory minimum PTO and pension contributions. Operating through a limited company wasn't particularly cost-effective even before the dividend tax change if you were actually running a real business and taking on the usual costs/overheads/risks of any other business, unless you were able to take advantage of something like Entrepreneur's Relief following an exit (and willing to accept the slightly strange limitations that come with that). Otherwise, it mainly only worked in favour of people like the ones you mentioned, who weren't running a real independent business at all and were simply skirting the law in an effort to abuse the tax system -- effectively, taking most of the perks of being an employee, yet getting the tax advantages of not being one. If the government had any idea what it was doing with the small business sector, it would surely have dumped IR35 and brought in a more suitable replacement to deal with that situation long ago. There was no need to hit all the legitimate businesses as well.
  - fauigerzigerk 9y ago
    >Not once you take the already applied corporation tax into account, though That's right, but you don't have to pay yourself a dividend. If you pay yourself a salary you are taxed exactly the same as any employee. The salary is of course a business expense reducing the corporation tax base. So taxes plus NI contributions paid by regular employees is your upper bound as a business owner as well. The whole dividends question is purely about how much less you pay than regular employees.
    - Silhouette 9y ago