Setting up as a company, effectively becoming a consultant or freelancer, could be in the future the best way to protect yourself from higher rates of tax announced by the coalition – there are signs that the new government is preparing to soften strict rules for the self-employed, including the IR35 rule, which have been in place for more than a decade. A company can also be used to divide income between family members who own shares in the company; known as “income splitting”, couples and/or some other adult close family members can then each apply their personal allowance to what could, in effect, be earned by only one individual.
The Queen’s speech on Tuesday 25 May confirmed changes to personal tax and pensions over the next 18 months, including increasing capital gains tax (CGT) rates to match income tax rates, although probably to no more than 40% rather than the 50% which will apply to higher earners. Here again setting up as a company could be used as a tool to shelter buy-to-lets from the rise in CGT or to avoid the 50p income tax rate, which David Cameron has confirmed will stay for now.
Consumer groups and accountants are hailing as a victory the coalition’s intention to revisit the IR 35 rule. Introduced in 1999, IR35 was designed to prevent individuals starting personal service companies with the sole aim of reducing income tax. Under IR35, HM Revenue & Customs may examine whether or not a worker might be deemed a ‘de facto’ employee and should therefore pay personal tax rates on all income. This has led to many disputes over the status, often uncertain, of workers and the coalition has now said it will replace this rule with measures that “do not place undue administrative burdens or incertitude on the self-employed”. Industry professionals are now predicting that HMRC will be directed to change its approach in order to remove some of the hurdles that freelance enterprises must jump in order to thrive and help boost the economy.
As with any change to the highly complex fiscal legislation that exists in the UK, expert analysis of texts and guidance notes will be necessary before the practical effects may be assessed. Individuals or companies who believe they may be affected by, or could benefit from, these changes should seek professional advice as soon as possible.
