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IR35 rules to hit private sector with 54% dividend tax

IR35 reforms targeting public sector contractors may soon be extended to contractors working in the private sector, who could be penalised with a further dividend tax hike of 54% on top of increased income tax and National Insurance Contributions (NICs).

This is according to shocking proposals within a consultation document leaked to ContractorCalculator that suggest the Government’s clampdown is much wider than previously thought.

“Despite the negative feedback the public sector IR35 reforms received, it’s not a massive surprise to see the Government applying the same rules to private sector contractors,” notes ContractorCalculator CEO Dave Chaplin.

“What’s far more shocking is the Government’s intention to punish ‘disguised employees’ by bringing in excessive dividend tax hikes, labelled as Section 010416 tax, that see contractors taxed more heavily than employees.”

Private sector off-payroll rules – how they will work

According to the leaked proposals, any contractor caught by expanded IR35 rules will be forced to pay tax at a rate of 54% on distributed dividends, described as a tax on credulity.

This rate of dividend tax will apply to all contractors regardless of which tax band they fall into. However, the new Scottish Rate of Income Tax (SRIT) means those contractors who can demonstrate residency in the country, may be subject to different rules.

The proposals do also allow contractors to retain their first £5,000 of dividend income each year tax-free because, contrary to common belief, the taxman does want to support the contracting community.

Simplified tests set to ease burden for contractor clients

The document highlights intentions to further simplify employment tests, ultimately aiming to determine a contractor’s IR35 status off the back of a mere 15 question questionnaire.

“It’s widely acknowledged that if workers are asked: ‘Do you fail IR35 and need to pay more tax?’ the vast majority respond no they don’t,” an anonymous source told ContractorCalculator.

“This obvious bias results in the worker keeping their money, spending it on their families and in the wider economy, and driving market forces in a near-on capitalist democracy type fashion.

“Taxpayers simply cannot be trusted, and so we felt inclined to issue the responsibility for determining IR35 status with engagers. However, we know a lot of them are busy as it is –- so we figured a short IR35 questionnaire would provide a win-win situation for everyone involved.”

‘Levelling the playing field’ between contractors and employees

“Disguised employment has been a drain on the Treasury for the past decade and a half,” claims one MP, who asked to remain anonymous. “And anybody caught within IR35 has probably been unlawfully avoiding tax for several years.

“The only logical option seemed to be to claw back as much of this lost tax as possible by bumping up dividend taxes some more.”

This extreme measure follows an apparent surge in disguised employment. Despite the Government’s off-payroll review in March 2015 concluding that 96% of public sector contractors had their tax affairs in order, media reports now claim 90% should actually be on the payroll.

It is also claimed that there are 20,000 workers avoiding an average of £3,500 in tax – and whilst 20,000 multiplied by £3,500 equals £70m, the Government believes the true figure for avoidance is £400m.

£400m tax yield finally in sight for the Government

The MP told ContractorCalculator how the £400m figure was reached: “We conducted our modelling on the likely tax numbers using two bags: One contained numbers from 1 to 1000, and the other the words million, billion and trillion.

“We mixed the bags up and then a blindfolded tax inspector picked one item from each bag and the number 400 came out with the word million. Simple.

“Obviously the £400m number is big, so it has to be correct. We decided the best way to make up the shortfall would be to overhaul IR35 and ramp up dividend taxes. The contractor community has mocked us for our tax revenue estimates, but these measures will ensure that we achieve our targets - and have the last laugh,” he added, before guffawing heartily.

“However,” the MP concluded, “one more positive arising from this new tax is the exponential growth in tax advisers we expect to see entering the profession. We are the party for business and job creation, after all.”

[Editors note: For those of you who emailed us asking, 'Is this an April Fool?' - the answer is yes. It's mainly nonsense of course.]

Published: 01 April 2016

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