Her Majesty’s Revenue and Customs (HMRC) is responsible for the collection of taxes in the United Kingdom. For a long time, the regulatory organization has been harsh to contractors with regards to tax. According to the president of the HMRC and a counterpart in the industry, there should be a standard structure of taxing all working citizens in the UK. This is irrespective of whether one is self-employed or in formal employment. A recent move by the organization indicated its intention to crack down on the self-employed, especially, limited company contractors. Although there are no implementations as per now, the changes in NIC and dividends allowance depict their intentions.
Evidently, contractors do not feel the love from the HMRC. Limited contractors are used to employing strategies that reduce their tax obligations. Typically, limited company contractors receive their payments in bulk through dividends as opposed to ordinary salary. Any contractor will confirm this is the most effective and favorable way to receive their payments to reduce bites of NIC. However, the regulatory organization thinks otherwise. HMRC bosses indicate their dissatisfaction with the process terming it as unfair to other regular employees receiving the same amount of pay as salary. The organization categorically stated its intention to straighten the process, by establishing a universal payment system for all workers.
Move on NIC
Although the HMRC has not directed or implemented any policies officially with regards to equalizing dividends and pay, the recent National increase for contractors is a development towards achieving that goal. Limited company contractors have been slashed allowance on their dividends from £5000 to £2000. Besides, the type 4 national insurance has increased from 9 to 11 percent. The objective of HMRC is clear in this case, to do away with the difference between salaries and dividends as a form of payments in the United Kingdom.
Objective of HMRC
Although there is still a significant difference between regular employees and limited company contractors, it is an indication of more policies to reduce the disparity in the near future. The increase of national insurance and slashing of allowances was only a minor move, which precedes relating policies. In few years to come, there is bound to be a negligible difference between the contractors and standard employees. There is also a possibility of completely equalizing these two groups of people. The aim is to achieve total parity in NIC and tax among all employees.
Shift to Umbrella Companies
The stiffening of policies has resulted to a significant move of contractors from limited companies to umbrella company net. While it is not yet clear if the HMRC is comfortable with the shift, umbrella companies are undeniably increasing in popularity in the United Kingdom. Killing limited companies might be a strategy by the HMRC to propel umbrella companies which the government can be technically one of the players. Nevertheless, HMRC perceives umbrella companies as a tax evasion vehicle.