Dividend Tax changes due to come into force on 6 April 2016 is just one more tax ‘sledgehammer to crack a nut’ solution used to tackle a problem that desperately needs tax simplification, not more legislation.
A second strong message sent by this new tax that will punish entrepreneurs and family business the most is confirmation that the Conservative Party is clearly no longer the party of enterprise and small business, or of marriage or families for that matter. Where do contractors turn to now?
For largely historical reasons, the gulf between tax on earned/employment income and investment income in the form of dividends has been growing. The purpose of the Dividend Tax changes is to try to resolve this issue, and level the playing field somewhat so that earned income is taxed largely the same regardless of its source.
But the solution proposed is unlikely to deliver the result that the Chancellor George Osborne intended. It will undoubtedly generate additional tax revenues, but for how long and at what cost to the UK economy?
If you think about it, IR35 was created to tackle the genuine problem of disguised employment. However, the solution disproportionately punished a small element of the business demographic.
IR35 has turned into an unworkable mess that has spawned an entire new industry of IR35 consultancies and insurances costing businesses thousands in unnecessary costs each year. And it raises virtually no tax – in fact, it costs the taxpayer more to fund IR35’s compliance teams than they raise in tax yield.
The way that the Dividend Tax changes have been imposed will undoubtedly influence the behaviour of entrepreneurs and business owners. Those that can move their businesses to locations where they can retain more of the financial success of their business will.
The Laffer Curve may also kick in as company owners who previously paid tax under the old regime now look for ways to avoid the changes to Dividend Tax. Despite HMRC’s crackdown on tax avoidance using powers such as Accelerated Payment Notices (APNs) and follower notices, the use of aggressive tax avoidance schemes could increase.
Many budding entrepreneurs will simply choose not to start a business because there is now a much lower ‘risk premium’. And ironically, it is the backbone of the UK’s employers who account for 60% of employment in the UK, the small family run business, usually jointly owned by husband and wife teams and family members, who have the least options but who will pay the most.
The Chancellor knows this, and it is this business demographic who probably voted him and the Tory Government into power. The Chancellor also thinks he knows better than the small business community about how to spend and invest the additional £6bn he will be taking from them.
So, we are left with higher and more complex taxes on those best placed to grow the economy, create jobs and maintain the social fabric of the country – entrepreneurs and family businesses. And these changes have been introduced by a Conservative Government, apparently supposed to be the very party that claims to promote business and family values.
Editors note (20th August 2015):
On 17th August 2015 HMRC published a Dividend Allowance Factsheet, which explained that the £5,000 Dividend Tax Allowance was to be implemented as a zero rate tax, contrary to what industry experts had agreed after the Summer Budget. Further, because it is now a zero rate tax (and not an allowance which would be taken off total income to arrive at taxable income) they confirmed that “Dividends within your allowance will still count towards your basic or higher rate bands”. For many contractors already paying higher rates of tax the consequence is an additional tax burden of £1,250 per year on top of the rises previously reported.
For more detail please see:
HMRC clarification of Dividend Tax changes will cost most contractors another £1250
To calculate the extra taxes you will be paying from April 2016, please use our Dividend Tax Changes Impact Calculator