Unfortunately, much of the comment has been misleading and has led to unnecessary uncertainty and worry for legitimate small businesses.
Our legislation will ensure that everyone who meets the accepted definition of an employee will pay tax on broadly the same basis. We estimate that there are currently about 90,000 people working through service companies who would otherwise be correctly taxed as employees.
They earn on average £50,000 a year, and of that they pay an average of 21% in tax and National Insurance Contributions, compared with the 35% which an equivalent direct employee would pay. And contrary to the suggestion that they are using their earnings to invest and grow new businesses, about 80% of them take out more than half of their company’s earnings in the form of dividends.
The tax system already contains rules to distinguish between employees and self-employed small businesses. We are not changing those rules. We are simply taking away a mechanism which has in the past allowed people to avoid their application. In all the debate, nobody has suggested a good reason why someone who works in the offices of a client, for a set number of hours a week at a fixed hourly rate, under the client’s control – in other words, in circumstances which are identical to the client’s own staff sitting alongside him, except for the fact that he is probably earning a lot more – should be taxed on a completely different basis, which allows him on average to pay £4,000 a year less in tax and National Insurance.
I believe that we were right to act, not just in the interests of fairness to other taxpayers, but also in order to ensure that measures in the tax system designed to support small businesses can be correctly targeted on people who are genuinely in business.
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