Contractors' salary-dividend mix 'not at risk'

Contractors who emerge with lower tax bills tax by minimising salary and maximising dividend payments are not within the scope of HMRC’s ‘£900m’ assault on tax avoidance.

Despite the government's claim that a taxpayer reducing their tax burden with help from an accountant will be seen by the Revenue as on a par with tax evaders, advisers say the ubiquitous ‘low salary, high dividend’ mix is effectively exempt.

The state's initial language, notably from the Treasury's chief secretary, suggested otherwise, unsettling limited company directors or shareholders who take larger dividends than salaries, because the dividends do not attract National Insurance (NI).

Contractors who structure their affairs in this way bypass the payment of full NI and income tax, as well as employers’ NI, which they would otherwise have to pay through an umbrella company.

“Reducing salary and paying appropriate dividends as many limited company owners do remains legitimate,” Mike Warburton, senior tax partner at Grant Thornton told CUK.

“Someone who forms a company and takes dividends rather than salary is not being attacked by HMRC. Who they’re really after, are the people who don’t declare any earnings or tax in the first place.”

Freelance tax specialists Qdos Consulting agreed, saying the deliberate drawing of a low, market-rate salary, accompanied with a higher value dividend payment, would remain the norm for limited company contactors.

“They should only be concerned about the greater risk they may be exposing themselves to of enquiry by HM Revenue & Customs,” said the firm’s freelance services manager Seb Maley.

“But they should rest easy in the knowledge that what they are doing is perfectly legitimate and sensible. This type of tax planning is not what HMRC has in mind when launching its offensive on those who do not want to play nicely.”

Until an HMRC update note last month, this offensive against “tax avoidance, evasion and criminal attack” was widely perceived to be gearing up with £900m of new money.

However according to the taxman’s October letter to agents, the £900m will be “recycled” money, accumulated from the savings HMRC has been asked to make in the Comprehensive Spending Review.

Mr Warburton, of Grant Thornton, reflected: “The jury is out on whether it will actually be £900m that the tax authority has to target non-compliance; it’s not at all clear that there is going to be that much.”

A former tax inspector preferred that the approach was an “interesting” way for HMRC to ‘incentivise’ its officials to meet savings targets, assuming those officials want the most resources possible to deal with non-compliance.

Qdos expects the Revenue’s staff to rise to the challenge. The firm said that, even if they don’t, “whilst the £900m may appear not to be a direct cash injection, the fact is that by other means this money will be available to HMRC for tackling tax avoidance, evasion and fraud.”

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