IR35 analysis: ‘Uncertainty in the evidence base’

A leading tax expert called for clarity over the rationale behind IR35 yesterday, as a Lords committee’s call to re-examine the “longer term case” for combining taxes on income and NICs was backed AccountingWEB members. Andrew Goodall reports.

Patrick Stevens, tax policy director at the Chartered Institute of Taxation, told AccountingWEB: “At the moment it seems to be that if the relationship between the person doing the work and the end user would be employment if there were no entities in the way, then the total amount of tax and NICs to be paid should be the same as if there were no entities in the way. That is what IR35 aims to achieve. If this policy is to remain the same the only question is how to enforce it better.”

He added: “If the intention is to change the policy so that inserting a company in this situation will change the basis of taxation as though someone were effectively self-employed, then everyone should be entitled to that and all employees who set up such a structure can have a more favourable tax position.”

Commenting on yesterday’s report on AccountingWEB, Tonyleigh said the real purpose of IR35 was to stop contractors paying themselves dividends free of NICs. Rather than do this by changing the NIC rules, he suggested, the government had introduced “the cack-handed employment status tests we have today”.

GazCol said IR35 had been “manipulated into something far above and beyond what it was ever intended to resolve”, but Ringi argued that removing it would “send a signal that anybody could avoid having to pay NIC by using a company”. The only sensible option was to combine income tax and NICs.

Peers called on HMRC to do “more robust work” to show that revenue protection provided by the IR35 regime outweighs the cost of the legislation...

Continued...

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Comments
johnjenkins's picture

And so    1 thanks

johnjenkins | | Permalink

it goes round and round. Eventually we disappear up our own backsides.

I'm sorry Patrick but you got it wrong. The relationship between work giver and worker can be a number of scenarios. HMRC are trying to dictate which one it should be to raise more money without any legal mandate.

HMRC should be there to police the different entities and to make sure that the content of those entities are correct not to decide which entity can be used.

Specifically IR35 takes away a limited company status (which could well be illegal). Logically then, it must follow that the entity providing the work has to treat the worker as employed.

However as it took so long to get rid of an expenses fiddler (why pay it back if you got a clean bill of health) then we got no hope of ridding the universe of IR35 in any form.

Mark Three's picture

@johnjenkins    2 thanks

Mark Three | | Permalink

john - agree with you.  IR35 started from the wrong premise.  The end client should employ anyone that is truly caught under IR35 and give these employees full employment rights.  A major rethink is required, but it won't happen.

IR35    1 thanks

fitzweb | | Permalink

Does this article also not address the fact that the self employed can also be "caught" by the IR35 legislation where they have only one contract?

Finance Act 1977:

Michael C Feltham | | Permalink

From memory as I have no time to look it up.

A section in this related to those working for one employer and caused hundreds of thousands of previously self employed persons to incorporate. The section also captured agency workers.

My wife was captured by this in the late 1980s and we then set up a limited liability close company. No further problems.

The causal reason for IR35 was the dreadful harridan Dawn Primarolo: Brown then jumped in, rubbing his hands with glee; more taxes to waste in profligacy!

Disguised Employment was never ever mentioned in the late 1970s.

As so often, it's the politics of greed: thankfully NCDs were short lived, despite Brown's desire to block the dividend route to NIC avoidance.

Unless a spouse has significant capital at risk in a Ltd Co, then I do personally agree, splitting the dividends 50-50 where the spouse does not actually work and  has no capital at risk is technically wrong and HMRC can dispute this under established tax codes.

But that ought to be all.

 

I know of quite a few    3 thanks

Helen H | | Permalink

I know of quite a few “individuals” who work / have worked for the Government bodies – commonly within the MOD – via limited companies.  These are individuals that have previously been employed by the government department and have, due to various cut backs, been made redundant, and have then been offered their old (or very similar) job back, so long as they are “Self Employed”.  In many cases the “Employer” has insisted that they can only deal with a limited company and not an individual, although I am not clear on the reason why, and therefore the Individual sets up a company and goes back to his/her old job, generally charging at least 150% more than they previously received as a salary.

But the good news is that the relevant department has cut its employment costs, it just doesn’t mention that they now pay considerably more in sub contract and agency costs!

I understand that this practice is not limited to the MOD, but also includes local governments as well as other large organisations.

It is difficult for HMRC to change the rules when the people making them are quite possibly part of the problem themselves.

Conceptual problem

Mallock | | Permalink

The authorities have a massive conceptual problem with abolishing or merging NI into Income Tax and even if we get over that hurdle what do we do about employer's NI? With employer's NI still in place there is still a significant saving to be made through incorporation.

As has already been said, the problem with IR35 is that HMRC tried to throw the net far too wide and it became ineffectual. I am aware of several people working in London using PSCs, in an office full of others all doing the same. They sit in the same office every day doing the same job and many have been there for several years. As far as I am concerned they should just be employees and the use of a PSC should never have been an option. These are the rules that need to be enforced more stringently with the employer having the liability for getting it wrong, not the employee. And who do these people work for? Surprise surprise....an organisation set up by the Government!

 

Another fine mess    1 thanks

Ian McTernan CTA | | Permalink

What we really need is less legislation.

We should combine NIC and income tax (after all, NIC is really just income tax under a different name).  Employer's NIC, a tax on jobs, would be scrapped.  Legislation would be needed to ensure on abolition day that the 13.8% saved is passed on to the employees as a one off 'pay rise' with no net effect on companies.

There would be no difference in taxation of dividends and other income, with dividends coming with a 20% tax credit (a real tax credit for individuals, based on corporation tax actually paid) and incurring the same unified rate (probably 25% and 43%) as any other form of income such as salary.  This way, there would be no practical difference in being employed or using a limited company other than being able to retain income within the limited company.

And of course, a wide ranging anti avoidance provision or two to stop the clever people designing schemes around it.

Taxation

bilco123 | | Permalink

N I was only ever shown separately from income tax to demonstrate to a not very bright public that it N I was a good tax to be used for the health service and pensions therefore not really a tax. N I and income tax should be combined and in the interests of transparency the employers contributions should be scrapped. Would any short term government ever sanction this kind of honesty? Not this side of a general election and maybe never.

Whilst at it all self employed persons should pay the same rates of N I and tax preferably in its combined form. Also all traders should be registered for VAT regardless of turnover. 

As far as setting up companies in order to be able to take modest salaries and big dividends is concerned surely a simple system can be devised to counter this? How about taxing dividends at the same rate as the combined N I and income tax as suggested above less the tax already paid by the company.

I could go on about companies setting up nominal offices in low taxation jurisdictions enabling them to undercut domestic competition and so grow at a faster rate but I will save that rant for another forum.

Over and out!

cfield's picture

Turkeys voting for Christmas?    3 thanks

cfield | | Permalink

Why are accountants in such a rush to merge tax and NI just to level the playing field? Tax planning for SMEs is one of the few advantages we have left over the hordes of amateurs trying to take our business away with low cost but shoddy compliance work and "pile 'em high, sell 'em cheap" number-cruching websites where the customer does all the work (to the best of their ability).

Thankfully, a lot of small businesses still see the benefit in hiring a qualified professonal who can a) do some useful tax planning for them, and b) keep them compliant so they get no hassle from the taxman.

Remuneration planning as in working out the optimum split of salary, dividends, etc, and making sure it is all done properly, is at the heart of that service.

Take that away by levelling the playing field on the various forms of income and there is little to justify the extra fees for a professional service. The small clients simply won't need us any more.

And as there simply aren't enough large clients to go round to provide a living for all the professional firms in the market now, many small firms with tax planning as their USP (or at least "unique" to those with the requisite knowledge) will either have to get part-time jobs to earn a decent living or pack up altogether.

We should be careful what we wish for.

Simplify the lot    1 thanks

NeilW | | Permalink

It's always going to be best to merge Income Tax and National Insurance with everybody paying the same regardless of whether they get their income as a wage, business income, dividends or investment income. 

The whole problem is down to trying to treat one source of income as 'better' or 'more worthy' than another sort - and that just causes huge distortions.

Contractors earn more by virtue of their ability to charge more to their clients for flexible services. If they can't then they should just go and get a proper job instead.

In other words it is the client that should be paying for the flexibility, not the state. 

cfield's picture

But NI was never meant to be just a tax    2 thanks

cfield | | Permalink

Ian McTernan CTA wrote:

We should combine NIC and income tax (after all, NIC is really just income tax under a different name).  

I agee NI has been turned into a tax by generations of politicians, but that was never its "raison d'etre". Originally it was meant to be a proper social security system where you provided for unemployment, sickness and old age by "insurance" contributions that would enable you to make a claim later if necessary.

The big mistake right at the start was not making it a properly funded system. It was always a case of tomorrow's workers paying your pension when you retire, rather than saving up for it yourself, as your contributions were being used to pay for today's pensioners.

Then they started giving away sickness and unemployment benefits to people who had never contributed anything, leaving little in the pot for those who did pay in to help them in their time of need. So benefits had to be reduced and the link between contributions and benefits gradually became eroded, first on unemployment and benefits and then on pensions, until now there is practically no link at all.

So yes, NI has become another tax, and a strangely regressive one too with its lower rate for higher earners (in fact 10 years ago there was no higher rate at all for the jolly good reason that incomes above the upper NI threshold did not count for SERPS - it was Gordon Brown who broke that particular link).

I'm not saying benefits and pensions should only be paid to people who have made NI contributions - obviously that would be unacceptable in a modern welfare state. But what I am saying is that unfunded pensions/benefits should come out of general taxation, not the NI Fund.

The NI Fund should be maintained only for people who have paid in to it. It should be compulsory, and they should get higher pensions/benefits than people who have not paid in. If they had stuck to that principle, we wouldn't even have needed to raise the state pension age or bring in auto-enrolment.

Better still, they could have invented a new social security tax or NI class (with no upper limit) specifically to pay the benefits/pensions of those who had never paid in (or not paid in enough) so it was crystal clear how much the welfare state was costing us.

johnjenkins's picture

@Mallock    1 thanks

johnjenkins | | Permalink

Employment status is not about what we think is right or wrong. It is fact. It is irrelevant whether you work for one work giver or many. The choice of status is between the worker and work giver. Messing about with that status puts IR35 in the position it is now.

We must amalgamate tax and nic (all forms) and have a basic rate of tax, so that all income in whatever form is taxed at the same rate (I hasten to add that I am against all forms of unearned income taxes, as the tax has already been paid prior to purchase or inheriting).

If Government want to decide status issues then they should make laws accordingly and definingly, or leave well alone.

cfield's picture

IR35 - barking up the wrong tree    1 thanks

cfield | | Permalink

Mark Three wrote:

john - agree with you.  IR35 started from the wrong premise.  The end client should employ anyone that is truly caught under IR35 and give these employees full employment rights.  A major rethink is required, but it won't happen.

I couldn't agree more - they put all the onus on the small guy (who was being forced to work through a company anyway in many cases) and let the big guys off scot free. They should have restricted IR35 to the Fridays-to-Mondays instead of trying to catch proper contractors.

I don't agree with those who say limited company contractors and the self-employed should pay the same tax and NI as employees. What about all the benefits employees get that the self-employed don't? Holiday pay, sick pay, redundancy pay, unfair dismissal rights, discrimination rights, now pensions, all at the cost of their employers. If the self-employed were earning more to make up for it, then maybe it would be right to level the tax playing field, but for most of them, that is just a dream or something that takes years to achieve.

I don't see where HMRC get this figure of 220,000 contractors from. By their own estimates, the PSC population is just 200,000. Contrary to what they might believe, most contractors aren't scared of IR35 any more. They haven't been scared of IR35 for about 10 years now when it became obvious what a load of mouth and trousers it was (apart from the unfortunate few who did get caught like "Mr Dragonfly").

I would estimate only 10-20% of PSC contractors don't follow the optimum salary/dividends route. Most simply keep their fingers crossed that IR35 won't apply to them or, if it does, that they won't get caught. Only those with "old-school accountants" who insist they should take a "respectable" salary on the basis it won't "flag them up" ever depart from that model. I think that's a myth personally. None of my contractors have ever been investigated in the 14 years now since IR35 came in.

Those that do stop taking a "respectable" salary through losing the "fear factor" would probably save a lot more than £500 a year. What HMRC should really have done is estimate the number of umbrella company contractors who would now see the benefit of running their own PSC.

But on their own figures, 80% of the potential loss to the Exchequor would come not from real contractors taking lower salaries but from the 4% of employees they suspect would go Friday-to-Monday. Which brings me back to my original point. Why don't they just target IR35 at the obvious cases? The ones who worked for the same company before (with an exemption for those who have properly retired and are just doing a bit of consultancy). Also, to make the erstwhile employer in such cases responsible for the lost PAYE.

Forget about the real contractors who might be saving a few quid in return for not lumbering the state or their clients with pension and employment rights. If we can "let off" the non-doms for bringing their business to this country, we can let off people who might be our future entrepreneurs too.

If there are only 200,000 PSCs and the working population is say 36 million, that's only 5.5%. Even less if you strip out the Friday-to-Mondays. Should we really be getting so anal about the loss in tax revenue from such a small number? Does it really justify the idea quoted in the OP of giving all employees the right to work through a company if they wish? I've never heard such nonsense - it would be open day for employers to fire their staff en-masse and for people to lose their employment rights for a few pieces of silver (a bit like the new rules for Employee Shareholders that came in last Sept). Just because it is much harder to tell the difference between being employed and self-employed these days, that doesn't mean we should abandon the distinction altogether.

stepurhan's picture

Jokes?    4 thanks

stepurhan | | Permalink

I do hope the following suggestions were not meant seriously. If so, I think that these have not been thought through very well.

Ian McTernan CTA wrote:
Legislation would be needed to ensure on abolition day that the 13.8% saved is passed on to the employees as a one off 'pay rise' with no net effect on companies.
Could you run some numbers on that for me. It seems to me that with varying tax codes and benefits in kind, the calculations for this are not as simple as you think they are. Not to mention that enforcing this one-off change across the entire working population would be impossible. A huge windfall for the less scrupulous employers.

Quote:
And of course, a wide ranging anti avoidance provision or two to stop the clever people designing schemes around it.
Which we already have and which already penalises people who have made genuine commercial decisions that bear some similarity to schemes wholly set up for tax avoidance.

bilco123 wrote:
Whilst at it all self employed persons should pay the same rates of N I and tax preferably in its combined form.
Nothing to reflect the lack of statutory benefits and job security then. I know we are talking about abolishing NIC, but you are still saying the self-employed should pay the same amount in without getting equivalent benefit back.

Quote:
Also all traders should be registered for VAT regardless of turnover.
Small businesses should be forced to charge as much as the big boys and engage in the vast amount of additional admin? Do you really think that a one-man handyman business should have to charge 20% more (or take a profit hit) and do a lot of extra record-keeping? Won't the additional cost of admin at HMRC far outweigh the VAT received from businesses at the lower end?

Tax law vs employment law

jdixon2614 | | Permalink

Mark Three wrote:

john - agree with you.  IR35 started from the wrong premise.  The end client should employ anyone that is truly caught under IR35 and give these employees full employment rights.  A major rethink is required, but it won't happen.

 

One of the many problems with IR35 is that if you are caught by it you are deemed an employee for the purpose of tax, but not an employee for the purpose of employment law ie it's a lose-lose situation.

"the only sensible thing is to xcombine tax and NIC"!!!

jiatbanus | | Permalink

"alongside a commitment to combine Tax and NI"!

You mean that you are content to combine a tax with an insurance. The insurance then vanishes. Is this not what they're aimimng for. To hide the most expensive insurance on the planet and to say that you're not entitled after you've paid for 50 years.

This falls into the same category as "NHS "free" at the point of delivery. What!! 25% of gross pay (after a small allowance).

You will also recall how CIS tax spread like a rash when it was brought in to catch up with "the lump" workers. ie. An engineering company builds fire escapes which he has to bolt on to the side of a building. HMRC says he's in the Construction Industry!

 

 

The reason the MOD would

AJ_edi | | Permalink

The reason the MOD would insist on dealing with a company is that they would not be at risk for any PAYE or NIC due in the future if the ex-employee were ever deemed to be caught under IR35.  The risk of the PAYE and NIC would fall on the company the ex-employee has to set up to get their old job back.  

Your last point is also right, I understand HMRC themselves have in the past done this with some of their VAT team.

I wish HMRC would recognise    3 thanks

stevie63 | | Permalink

I wish HMRC would recognise some of the commercial realities here.  The engager in my experience wants a flexible arrangement.  They usually drive the decision to operate through a PSC presumably to keep the relationship outwith employment law.  Yes there are tax benefits for the individual but they have signed away their employment rights at the behest of the engager.  This primary motivation seems to be overlooked.

 

mydoghasfleas's picture

As ever when IR35 is mentioned ........

mydoghasfleas | | Permalink

...... everyone knows the thing it is likely to raise more than tax and NI is blood pressure.

Then it degenerates into a free for all where everyone lobbies everyone else with their views.  A few insults are traded either with each other, generally prefaced "with all due respect" and the rush of blood to brain starts to subside.

The only way to get things changed is to do something about it.  By doing something I mean really doing something most of what is going on here is the equivalent to clicking "like" on Facebook in the misguided belief that it makes a difference.

Judging by the number of comments posted at lunchtime perhaps we should all get out more.

What happens if Co is caught by IR35

frankdavid | | Permalink

If a contractor working through a limited company using small salary/ big dividends  route is caught by HMRC under IR35 and is assessed to a huge tax /  NIC bill which company cannot pay what happens next ?  Does anyone have experience of HMRC claiming successfully  on the director ?

There has been no personal liability for IR35

davechaplin | | Permalink

frankdavid wrote:

If a contractor working through a limited company using small salary/ big dividends  route is caught by HMRC under IR35 and is assessed to a huge tax /  NIC bill which company cannot pay what happens next ?  Does anyone have experience of HMRC claiming successfully  on the director ?

At ContractorCalculator we've been following all IR35 cases for 15 years (yes, we need to get out more too!). We've not heard of a single case where HMRC have gone after the director of the company for personal liability having lost an IR35 ruling. For contractors, IR35 is all about managing the risk. Get all one's ducks in a row, and build an ongoing compliance file in case HMRC come knocking. Then have good tax insurance so a proper expert can bat back an investigation. And then if it goes to tribunal and you lose, and there's no money in the company.....we'll, they don't appear to come after anyone. And HMRC seem to think ramping up to 250 investigations per year is enough to generate a £550m deterrent effect - a figure which is based on flawed reasoning. It's all nonsense.

The risk to most contractors with IR35 isn't the extra tax that might have to be paid. It's the expensive cost and hassle of having to defend one's position if investigated.

Merging PAYE and NI is the answer, but it will take time. Tax payers need to be educated about what tax they are paying first, so when it is merged it doesn't look like tax has shot up from 20% to 32.8%. Maybe that's why these new personalised tax reports have been invented... to educate people and manage future changes.

 

johnjenkins's picture

Government knows

johnjenkins | | Permalink

that by putting tax payers on PAYE they get more money. That really isn't rocket science and that is where the real problem lies. Mr Brown used it to cover his losses and it has continued ever since.

Taxation is rather like the EU. Everybody knows it has to be changed but nobody has had the guts to do anything about it until now. Mr Farage has started the ball rolling on the EU and has been given a tremendous boost by Mr Clegg. Whatever anybody says IR35 is dead but not yet buried (don't tell HMRC they think it's still viable).

One thing we know is certain HMRC will come up with some ridiculous new scheme to re categorise the self-employed and get rid of one man band ltd cos.

Merging Income Tax or NI

adbanks | | Permalink

"The only sensible option was to combine income tax and NICs."

This line has been trotted out for a long time, and while it has merits for simplification (assuming employEE NICs only) it does not solve the IR35 conundrum.

Politically, any such merger could only go as far as creating an Employment Income Tax rate of 32%/42%/47% - with dividends and interest continuing to be charged at Savings Tax Levels (ie 0% on the first £1500, then 20%/40%/45%)

--

The problem of IR35 is, and always was, about who it was trying to capture, and finding ways of doing so... back in 1999 I observed that the target was those who had incorporated to get around s134/ICTA1988 and I maintain that those are still the primary target.  How many non-agency persecutions have there been (deterent effect nothwithstanding)

Likewise, the iniquity of IR35 is that the "disguised employee" takes the full brunt of the liability, whereas the "disguised employer" (aided and abetted by employment agencies) get off risk free.

---

Merging income tax and NICs will not address any of this.

Personal Service Companies

kjevans | | Permalink

The phrasing of this question changes every year. Last year, almost every very small or micro business in the service sector with a limited company should have answered "yes" to "Are you a PSC?" (meaning that they got the majority of their income from work done by shareholders - the boss and spouse and kids, for example). That doesn't really mean that they would be subject to IR35. Some years, a tiler with a Ltd Co might make more money from selling tiles than from installing them. not a PSC, then the next year more form installing them, a PSC. The whole thing is crazy.

There used to two questions: the second about being caught by IR35, to which most of those businesses would have answered, "No".

Now there is one question, which combines the two. Given boolean logic, that means that very few companies would answer "yes".

Not surprising that there is no meaningful data on numbers.

 

DMGbus's picture

Investment Income Surcharge

DMGbus | | Permalink

Some of us can remember Investment Income Surcharge (IIS) - at a rate of 15% on top of dividends/interest (maybe rental profit too) above a certain threshold.    This, it seems to me, that Investment Income Surcharge is one avenue to explore to compensate for lack of NIC on profits extracted as dividends.

In the days of IIS the top marginal rate of tax could be as high as 98% - earn £100 and keep £2!  £83 income tax + £15 IIS payable on marginal extra income of £100..

 

IIS

zeitghost | | Permalink

Ah, the glorious days when it made sense to rent your suit.

 

Not Insurance

fionamcke | | Permalink

 jltbanus - NIC is not an insurance. Successive governments have reduced income tax and increased NIC. These contributions go into the general tax pot; and they are regressive on the employee and a jobs tax on the employer.

That huge amounts of tax are now called 'NIC' is leading to more and more complications,I'm assuming the proposals about LLP partners are motivated by this.

NIC on employers is also a hidden tax, very few employees realise their employees pay 13.8% on their salaries. This gives a huge incentive to politicians to keep increasing this percentage (as they have done). Those who say it would be politically difficult to combine NIC with income tax are effectively agreeing that people would be horrified if they understood how much they are REALLY taxed on their salaries.

 

Why bother then

frankdavid | | Permalink

davechaplin wrote:

frankdavid wrote:

If a contractor working through a limited company using small salary/ big dividends  route is caught by HMRC under IR35 and is assessed to a huge tax /  NIC bill which company cannot pay what happens next ?  Does anyone have experience of HMRC claiming successfully  on the director ?

At ContractorCalculator we've been following all IR35 cases for 15 years (yes, we need to get out more too!). We've not heard of a single case where HMRC have gone after the director of the company for personal liability having lost an IR35 ruling. For contractors, IR35 is all about managing the risk. Get all one's ducks in a row, and build an ongoing compliance file in case HMRC come knocking. Then have good tax insurance so a proper expert can bat back an investigation. And then if it goes to tribunal and you lose, and there's no money in the company.....we'll, they don't appear to come after anyone. And HMRC seem to think ramping up to 250 investigations per year is enough to generate a £550m deterrent effect - a figure which is based on flawed reasoning. It's all nonsense.

The risk to most contractors with IR35 isn't the extra tax that might have to be paid. It's the expensive cost and hassle of having to defend one's position if investigated.

Merging PAYE and NI is the answer, but it will take time. Tax payers need to be educated about what tax they are paying first, so when it is merged it doesn't look like tax has shot up from 20% to 32.8%. Maybe that's why these new personalised tax reports have been invented... to educate people and manage future changes.

 

 

If it is  the case that HMRC have never gone for a director after proving that IR 35 should have been applied then why not simply liquidate the company. Surely it could be argued that the dividends declared before losing the fight were properly paid.

And I completed and audit to this affect    1 thanks

ann1987 | | Permalink

In early 90's I completed an audit in a government body to check the incidence of employees who had been made redundant and then phoenix like became a limited co and returned on contract. The manager who received the report refused to agree with me " it isn't happening" was his reply.............

 

Combining NI and income tax and all businesses should charge vat

bilco123 | | Permalink

If the self employed pay the same then they should benefit the same in terms of sick pay and pensions.

All traders should be registered for VAT. A little bit of proper record keeping is not that big a deal. Small traders are discouraged from growing because of the VAT threshold. Also those who try to grow are automatically penalised by being put at a competitive disadvantage by going over the threshold. The ducking and diving resorted to in order to stay below the VAT boundary would be reduced. We all know the scenario where the customer buys the parts and the tradesman fits them. Or heaven forbid gets paid in cash. It would be reasonable for micro start up ventures to have a period of say six months trading before registering for VAT. 

VAT thresholds

Mallock | | Permalink

When VAT was temporarily reduced to 15% there was a noticeable change in attitude from those that might otherwise be tempted to indulge in some measure of avoidance/evasion.

Like all taxes there comes a level at which people decide it is worth the risk to avoid paying it. The answer is not to force every business to be VAT registered but instead to charge VAT at a rate the vast majority consider not to be worth avoiding and also at a level that makes the step up to registration less severe. I think 15% hit the sweet spot nicely.

cfield's picture

VAT for all traders - no way!

cfield | | Permalink

bilco123 wrote:

All traders should be registered for VAT. A little bit of proper record keeping is not that big a deal.

Yes it is! It's a huge deal having to keep VAT records and submit quarterly returns. You will just encourage more black market activity.

As always, the honest traders will register and suffer the consequences, as the dishonest (or more likely those who don't even know) undercut them and pick up all their trade from domestic customers.

Everything else you say about the VAT threshold discouraging small businesses from growing is true, although at least the threshold is high enough in most cases to demarcate the serious firms who should be VAT registered from the one man bands who shouldn't.

The real problem confronts those firms on the cusp, where VAT has a dramatic cliff edge effect. The solution is my view is as follows:

a) introduce a marginal VAT rate on turnover above the threshold so it only kicks in gradually. Only once turnover reaches say £150k would the whole lot become VATable at 20% (ignoring the reduced rates for energy efficient installations, conversions, etc)

b) exclude construction materials (supplied to non-registered customers) from business turnover for the purpose of determining whether the VAT threshold has been reached.

Such reforms would have a levelling-off effect and allow growing firms of around £100k per annum turnover to remain competitive when quoting for domestic jobs until their overheads and regulatory duties grow so large that they cannot compete with the smaller firms anyway.

Fiona re "not insurance"

jiatbanus | | Permalink

I didn't spot the notice in the last 50 years when it was said to delete "insurance" and transpose "tax".

How Gov behaves and what is right are far apart from the truth.

Because it is the reality and what we are led to believe does not make it the truth.

I recall well how McBrown announced that NICs were being increased by ONE PERCENT when the truth was that it was ONE PERCENTAGE POINT which equaled TEN PERCENT.

 

 

johnjenkins's picture

If I remember rightly

johnjenkins | | Permalink

(I'm sure someone will put me right) Tony Blair, in one of his election speeches, said that if the public wanted a decent NHS they wouldn't mind paying for it and with that GB stuck another 1% on NIC. That bloke really had a way with words.