UK contractors have voiced their dissatisfaction over the government’s response to a petition asking them to reconsider the impending dividend tax hike.
The petition, signed by contractors across the country, broke the 10,000 barrier, forcing the Government into a response. However, the meagre three paragraph reply has done little to diffuse tensions. In fact, if anything, the response has only served to rile contractors further.
As anticipated, the Government defended its plans somewhat fastidiously within its reply: “Taxpayers and the Exchequer will now be £500 million better off as a result of reduced incentives for tax motivated incorporation.
“Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed.”
However, according to James Leckie, of ITcontracting, the reply is a misunderstanding of how and, more importantly, why contractors work the way they do.
“This is a profession and a way of life. [It’s] not some short-term ‘tax saving opportunity’,” said Leckie.
The government’s response continues: “As set out at the Summer Budget 2015, the Government believes that one of the best ways to support growth and enterprise in the UK is through lower and more competitive Corporation Tax rates.
“It is not possible to continue to reduce the corporation tax rate without looking at the overall balance of the tax system, including taxation of dividends.”
However, Leckie believes raising tax on ‘one man bands’ to fund a lowering of corporation tax is somewhat unequal – an argument that certainly holds water when reports state Facebook UK paid less than £5,000 in corporation tax last year.
“The Treasury could raise even more funds through ensuring large companies actually pay the tax they owe, rather than allowing corporations to channel their profits through complex offshore tax structures.”
The main rate of corporation tax has declined from 28 per cent in 2009 to 20 per cent this year. But Leckie argues that “this is the rate paid by larger companies with high profits”.
“Those making £300,000 or less per year have been paying corporation tax of 20 per cent, or 21 per cent since 1998,” added Leckie.
The Government acknowledges that the dividend tax hike is one of the ways to foot the bill for extending the reduce corporation tax rates to larger businesses.
However, their official response sought to appease SMEs saying “owners of small companies will also benefit from a range of other measures announced at the Summer Budget, namely contractors will pay less tax as a result of the increases to the tax-free personal allowance to £11,000 and to the higher rate threshold to £43,000 in April 2016”.
But Leckie concludes by suggesting the above is a largely unconvincing and misleading assertion: “Successive governments have been guilty of exploiting ‘fiscal drag’ to raise taxes whilst appearing to be benevolent to taxpayers”.
Take part in the debate
If you’d like to show you support for the petition to urge the Government to reconsider the new dividend tax for small businesses, click here and join the 30,000+ signatures and rising.
Image: Derek Key