Thread by @georgenturner

Corporation tax is trending in the UK on Twitter because people who are freelancers and contractors but run their affairs though a personal service company are outraged that they are not receiving a bailout given "they pay corporation tax"

These people may well pay corporation tax, but that does not mean they are not engaging in tax avoidance. These structures are a very common tax avoidance trick.

It basically works like this. Rather than invoice your employer, declare your income on a tax return and pay your taxes, you set up a company which invoices the employer for you.

The company then pays you a nominal salary, which is tax free because it is at or below the personal allowance threshold. Then the rest of the profits are taken out as a dividend, after the company pays corporation tax. Corporation tax is 19%, leading to a large tax saving.

Many have pointed out that the dividends once received are also subject to tax, and that is true, but dividends are also taxed at a lower rate and come with their own allowances so the sum total of tax paid is still less than the income tax that would be due.

The big saving is not paying national insurance. In addition to this, some people do income splitting, where half the dividend is paid to their partner, so their personal allowance is also used up, lowering the total taxable income substantially.

All of this can result in big tax savings. As is set out in online guides for the contractor community.

Contractors are now complaining that because government support focuses on employment income (excluding dividends) and their tax avoidance scheme means that they hugely lose out.

Lots of the debate around this revolves around the question - Why should the government pay out to people who have deliberately set out to avoid paying the same amount of tax that their friends and colleagues were paying on similar incomes?

As much as I think that is an important question, it is actually a bit more complicated than that.

Contractors are complaining because they see their dividends as income. This proves the intent of these schemes was tax avoidance, because dividends are not income, income is income.

If contractors simply declared their income as income there would be no problem.

Dividends are a distribution of profit based on share ownership. A return on equity. Equity is risk capital. And risk really means risk. If a company does not make a profit, there is 0 obligation on the company to payout to shareholders.

This happens all the time, in good times and bad. Real companies engaged in real business sometimes see a dip in profit and choose not to pay out a dividend. Shareholders can do nothing about his and have no possible avenue of complaint. It is part of the deal.

If your employer just decides that are not going to pay you one year - that is a big deal.

SO given that limited company contractors have chosen to put all their business income into a risk asset, when the profits dry up, what possibly could be the argument for compensation?

Either these are real shareholdings which come with real economic consequences (apart from the tax consequences) or they are not.

If they are not real shareholdings and are purely created to disguise income, then the avoidance is probably not lawful.

taxwatchuk.org/is_tax_avoidan…

Secondly, if the government did include dividends in its calculation of the support that should be paid to the self-employed, what would be the argument for not compensating all shareholders for their losses? Including the heavy losses investors have taken in recent weeks?

How could the government distinguish between real small business profits, and the self-employed setting up intermediary companies to receive income as dividends?

Some may think the announcement today is harsh, but I really think it is the fairest way of dealing with the problem.

Going forward, I do think the long term solution is for the government to think about who can incorporate. In the United States this kind of tax avoidance is not possible, because one man band companies are S-Corps which are taxed at personal income tax rates rather.

Rather than at corporation tax rates.