Tories propose abolishment of IR35

IR35 Test

As reported in the Telegraph, small business taxes could be cut by more than £500 million a year under proposals being published today by the Tories.

Oliver Letwin, the shadow chancellor, has identified three tax cuts he would like to implement in a "consultation paper" on taxation.

The three proposals are:

  1. abolishing the so-called IR35, at a cost of up to £300 million;
  2. abolishing the non-corporate distribution rate, at a cost of up to £340 million;
  3. and changing settlement legislation for husband-and-wife businesses (known as 'section 660').

'Menu' of options

Whilst this appears encouraging the consultation paper, like the others recently published, is being seen by Mr Letwin as a "menu" of options from which the party will choose.

The Tories will not say exactly which taxes they would cut in their first year until after Gordon Brown's Budget, which is likely to be in March.

The Tories think IR35 imposes unnecessary complexities and burdens on business. Although IR35 raises £300 million for the Treasury, Mr Letwin believes that abolishing it could actually save money for the taxpayer because there is some evidence that the tax has forced some contractors to go abroad. The Tories think the total tax yield could actually go up if such workers were to be encouraged to return.

Wait and see

Whilst this news is encouraging for those currently caught by IR35, one must be aware that this is currently a proposal on a 'menu' of options that could be chosen by the Tories if they are elected.

With labour unlikely to repeal IR35 themselves, combined with their current odds of 6-1 on of winning the next election contractors and small businesses should not get too excited about this recent announcement.

How would the changes effect you?

The removal of the non-corporate distribution rate will have no affect for contractors earning over £15 per hour.

For a contractor earning £35 per hour, abolishment of IR35 would result in an increase in take home pay of around £787 per month. . You can calculate your own personal savings using the IR35 tax calculator

To calculate how the proposal changes could affect you use the Section 660 calculator.

Published: Monday, January 03, 2005

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