Quote:
Originally Posted by Chris
If you own a small business - or even a somewhat bigger one - you can choose to pay yourself mostly or almost entirely in share dividends. This income is taxed as capital gains at a far lower rate than income tax.
And yes, if you make profits some years and losses in other years, then you can offset your losses against your profits to reduce your tax bill - in that sense they absolutely do ‘compensat’e you.
Well-off business owners with wily accountants are legally avoiding significant amounts of tax by being able to choose the way their income is taxed in the way a regular PAYE employee can’t. It’s a loophole that needs closed on a point of principle and which will bring more money into the exchequer into the bargain. It’s hard to make a direct comparison but federal income tax and capital gains tax rates in the USA, for example, are much more closely aligned than they are here, and the USA has a far more positive attitude towards capital investment than we do.
If aligning our income tax and cap gains tax rates causes investment here to plummet then we have far deeper problems than a tax rate.
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Remember that if you are running a small company and you are the sole employee, you personally have generated all of the revenue. The business will have operating costs on a daily basis, investment in equipment etc, accountancy fees, PAYE fees, the cost to process and collect VAT for HMRC, insurance fees such as professional indemnity and public liability. If the director takes a salary there's employer NI and finally the corporation tax. The director can only take dividends out of what's left after all of this has been paid, but remembering to leave a surplus of retained profits for lean periods.
Offsetting losses is not much help in reality for a small business if there's a lean time where there is little or no money being generated.
Do they pay double taxation in the USA as we do when a contract has been deemed to be inside IR35?