IR591

On Wednesday 10 December 2003 the Chancellor of the Exchequer announced in his Pre-Budget Report "specific proposals ... to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company".

Section IR591 of the document states:

“The Government has introduced a range of measures and targeted tax reductions to support small businesses; including through reform of capital gains tax, reducing the rate of corporation tax for smaller companies and the introduction of a zero rate, Stakeholder Pensions, and the abolition of advance corporation tax. These measures are encouraging the creation of more small companies, including through self-employed people incorporating their businesses. The Government is keen to ensure the measures it has introduced provide support for these firms taking on the opportunities and responsibilities involved in that transition, and to encourage them to reinvest their profits and grow their businesses. At the same time, the Government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals’ tax liability, and that support should continue to be focused on growth. The Government will therefore bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company, and so protect the benefits of low tax rates for the majority of small businesses.”

The government believes that some companies are taking advantage of provisions which let companies make national insurance and tax savings on dividend payments. When the move goes ahead it is expected that some small owner-managed businesses will pay much higher tax and national insurance.

The proposals have left experts believing that the impact of the IR591 could be far greater than the controversial IR35 tax which has caught thousands of computer contractors and other freelancers. Experts have suggested that as many as 300,000 businesses in the UK could be hit.

More details of the Inland Revenue IR591 legislation are expected early next year.