Self Assessment changes will let directors separate earned from unearned income
- 11 May 2023
- Joshua Toovey
For many self-employed business owners, dividends form an important part of remuneration. A large number pay themselves only a small part of their income as salary and then anything they need to take out beyond that is taken as dividend payments.
But we know that during the pandemic, government refused to extend tailored support to limited company directors based on the way that these self-employed business owners were choosing to pay themselves.
Despite calls from IPSE and other groups, Ministers and Treasury officials consistently cited HMRC’s data on dividends (or lack thereof!) as the main stumbling block for not extending support. This pushback from government centred around unearned income and the difficulty in separating investment-type income from that generated by a contractor’s own services.
The proposals from HMRC
Back in October 2022, HMRC released a consultation on improving the data that it collects from customers which IPSE responded to with written evidence whilst also meeting with HMRC officials to provide feedback.
We have since learnt on the wonderfully named ‘Tax Administration and Maintenance Day’ – Christmas day for those with an interest in tax policy – that government is pressing ahead with their plans to collect additional data on dividends and the start and end dates of self-employed businesses. This will likely come in the form of draft legislation before being included in a future Finance Bill.
At IPSE, we are particularly interested in the proposals that would reform Self Assessment to gain improved data on dividends.
Currently, a Self Assessment tax return includes a question or box where company directors can report to HMRC that they are a director of a limited company, but this is optional and not compulsory.
Self Assessment also requires taxpayers to declare all dividends received from UK companies.
The proposals from HMRC would see the optional question on whether you are a limited company director become compulsory. Similarly, two new questions within the Self Assessment form would then require company directors to input the exact value of dividends received from their own company before asking for the percentage shareholding in the company.
Similarly, tax returns would also require company directors to input the start date of their self-employed business.
Why are HMRC making these changes?
The answer to this question largely depends on your outlook towards HMRC. The justification given by government for improving the data it holds on dividends and percentage shareholding is so that it can make more informed policy interventions.
The consultation document even references the previous role of such data in determining government’s economic response to the pandemic.
Most importantly, the requirement to report dividends and shareholding structure will allow for government to separate investment-type income from service and labour derived income, and ultimately allow them to recognise the dividend to be earned rather than unearned income.
Similarly, should the data be published anonymously – as IPSE has called for – the data could add another important metric that government (and IPSE) uses to measure the impact of public policy on the self-employed. For instance, it would’ve been easy to see that the IR35 reforms in the private sector resulted in a dramatic drop in the overall number of limited company directors (whether government would’ve considered this as a negative is another matter).
Should contractors be naturally wary of the proposals?
For the 1.6 million excluded from support during the pandemic, this latest proposal from HMRC will feel like too little too late.
Whether the Treasury would’ve extended support to company directors had they been in possession of the data on dividends and shareholding structure is also up for debate. Let’s not forget that the Chancellor and the Treasury were unwilling to engage with many of the concerns raised about the support schemes by IPSE and other groups.
The then Treasury Select Committee Chair Mel Stride even commented at the time that “the Treasury needs to have more political will and help the self-employed who are desperate for support”.
With the imposition of IR35 changes and the launching of Managed Service Company investigations over the past few years, contractors will also be understandably concerned that HMRC will seek to use the data to perhaps further target those who choose to work through their own limited company.
In our response to the consultation and in discussions with HMRC, we also voiced our strong suspicions that the additional data around dividends could be used by HMRC for compliance purposes and increase the potential for retrospective investigations that are deeply stressful and time-consuming for freelance businesses.
It remains to be seen exactly how this additional data will be used by HMRC, but if government is committed to introducing this additional requirement on contractors when filling in their Self Assessment, government must publish this data anonymously so that it acts as important metric and aids in overall policy development and scrutiny.
Your feedback matters
If you have any thoughts on the planned changes to Self Assessment and their potential impact, we’d love to hear from you.Contact us
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Senior Research and Policy Officer
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