Four thousand UK businesses could be stung with tax bills of almost 60% of their income from next year, in a throwback to the high-tax regimes of the seventies and eighties.
The massive double-tax hit arises as a result of the government’s notorious ‘IR35’ crackdown on personal services companies, which comes into force next month.
Accountancy Age has learned that the new rules will force businesses in the building industry to ignore tax deductions of 18% already suffered under the construction industry tax scheme before they calculate their IR35 tax bill.
Those falling under both the IR35 and the construction industry rules will therefore end up paying tax on income that has already been partly taxed.The Inland Revenue admitted this week that an estimated 4,000 businesses fell under both sets of rules.
For those affected, income subject to basic-rate taxation will be hit by a tax and national insurance bill totalling around 52%, while the figure for income subject to the higher rate will be 58%.
They will eventually be able to reclaim the 18% portion deducted under the construction scheme, but tax experts warn this may take up to two years, which could leave many of those hit with serious cashflow problems.
Alastair Kendrick, tax director at Ernst & Young, said: ‘The IR35 draft legislation requires personal services companies when calculating the PAYE/NI to deduct tax which may have been withheld under the construction industry tax deduction scheme. This means there is a double taxing.’
He also warned that the red-tape burden of falling under both sets of rules could lead to personal services companies making accidental errors in their tax computations.
The Revenue said this week it was looking into the problem. ‘We are monitoring the effect of the CIS scheme on small businesses generally, and the effect of the deduction scheme on cash flow for people who will be entitled to refunds is one of the issues we are looking at.’
But Liz Bridge, tax director at the Construction Confederaton, the major construction company trade body, was less concerned.
She admitted there may be some ‘hard-luck cases’ among those hit by both regimes, but said that many personal services companies in the building industry had been set up purely to avoid PAYE, and in such cases the Revenue was rightly closing a loophole.Phantom self-assessment penalty notices prompt calls for compensation