IR35: Not out of the woods yet

I hadn't picked up on the "abolished" comment. I was aware they were going to review it, so I'm not surprised the DBIS press office aren't saying much yet.

Nor should we assume that it will mean a return to the big pre-IR35 savings. More likely/hopefully we will see a simpler system with more certainty than at present, though this could still mean a higher tax bill overall

Wouldn't that be a review of pretty much the entire tax system?

It seems pretty obvious that the intention is to review it and find a simpler alterrnative to IR35 if they can. That's welcome but I'm not sure we should get too excited. An alternative to IR35 still implies legislation to stop tax avoidance, which will inevitably give us something to complain about. Unless of course they even up the tax rates in some way, which would no doubt be even more difficult to do from a political perspective. And then the PCG and others may not be so pleased. There is no way they are just going to abolish IR35 and say "that's the end of it".

I'd be tempted to say "IR35 is being repealed but we need to review small business taxation".

What I would then do is as part of a new "Small Business Taxation" bill revoke IR35, but also put very close cuffs on small businesses about when or how they can take dividends to prevent what HMRC terms abuse, namely the two aspects that the IR35 and S660a attacks were meant to target, namely:

1. Regulations covering the employment of spouses and relatives within close companies to ensure that employment pay and conditions are "fair value" (i.e. arms length and comparable to general employment market).

2. Regulations covering the distribution of dividends within close companies such that the total dividends cannot exceed the amount due under PAYE. This would incentivise firms to retain capital as they are small and would allow higher dividends to  be paid as the company expands through growth and employment (which is what we are trying to incentivise). This would have the additional benefit that those companies that are effectively one-man-bands and possibly false self-employment would be limited to taking 50% of their profits as PAYE based salary and the remainder through dividends.

Provided that the rules are clear and unambiguous, there is no reason why the above could not easily be enforced. If close company directors complained, then the simple answer would be "Expand then".

Obviously, I'm just a simple moron, but I think this idea has at least some merit.

I think one of the reasons the s660a update stalled was that the previous government realised the "fair value" test was simply unworkable because it was far too subjective. Far worse indeed than IR35 as far as uncertainty was concerned. I doubt very much if the present government would want to revisit this thorny question.

As for controlling dividends of close companies, this is problematic on several counts. First, it tilts the entire playing field against small businesses if there are no similar constraints on bigger companies. Second, although a close company is well-defined in law, it's easy enough to make a close company non-close, simply by including more shareholders (for example, some 'umbrella' companies set up to avoid IR35 may be non-close).

I think the government will find it very hard to find a workable AND fair answer to small business taxation without looking at business taxation in general. Levying income tax (and NI?) on ALL dividends received by individuals might be an obvious answer, but politically unlikely from a Tory-led government - and it would need to be matched by tax credits (as in the old days) or reduction in corporation tax, to avoid unfair double taxation.

Levying income tax (and NI?) on ALL dividends received by individual

What, even Mrs. Green of Monaco ?