Proposed Self-Assessment Changes for Directors

IPSE has an article on HMRC’s proposed changes to the way it collects data on directors’ dividends. The landscape of the self-employed and company directors in the UK is rapidly evolving, and with the latest changes proposed by HMRC to the Self Assessment system, there’s a lot to unpack.

The Background

For a vast number of self-employed business moguls in the UK, dividends – a sum of money paid regularly by a company to its shareholders out of its profits – represent a crucial part of their pay. Often, they would pay themselves a nominal salary and rely on dividends for the rest. However, during the tumultuous times of the pandemic, these business owners felt sidelined by the government, which did not tailor support for them based on their unique remuneration methods.

A persistent reason cited by Ministers and Treasury officials for this oversight was the lack of precise data on these dividends. The crux of the matter was the challenge in differentiating money earned from investments from that earned through a contractor’s professional services.

HMRC’s New Proposals

In October 2022, HMRC unveiled a plan aimed at refining the data it acquires from taxpayers. IPSE (the Association of Independent Professionals and the Self-Employed) not only submitted evidence to this consultation but also actively interacted with HMRC officials to share feedback.

Come the ‘Tax Administration and Maintenance Day’, the government confirmed its intention to gather more precise data on dividends and to track the life cycle of self-employed businesses. This will likely materialise as draft legislation and subsequently be included in an upcoming Finance Bill.

So, what changes can we anticipate in the Self Assessment system?

  1. The once-optional declaration for company directors to state their status will now be obligatory.
  2. Directors must specify the exact dividend value they received from their own company.
  3. They will also need to declare their percentage shareholding in the company.
  4. Additionally, directors will have to state the commencement date of their self-employed venture.

Why These Changes?

The government’s rationale behind these alterations is to possess a richer reservoir of data, enabling more informed policy decisions. A significant part of this move is to segregate investment-derived income from the income due to service or labour. This distinction would classify dividends as earned income rather than passive or unearned.

If this data is released in an anonymised manner – a move championed by IPSE – it might become a valuable tool to evaluate the influence of public policies on the self-employed. For instance, it would highlight the repercussions of the IR35 reforms in the private sector on the number of limited company directors.

Concerns for Contractors

However, there are trepidations. Over 1.6 million felt neglected during the pandemic, and this latest announcement might seem like a belated attempt. It’s uncertain if the Treasury would have behaved differently during the pandemic had they possessed this dividend and shareholding data earlier.

Furthermore, with recent upheavals like IR35 reforms and the launch of Managed Service Company investigations, there’s an underlying fear among contractors. They worry that this newly harvested data might be wielded against those operating through their personal limited companies. IPSE, echoing these concerns, has stressed that HMRC’s possible use of this dividend data for compliance could pave the way for taxing retrospections, bringing along unwelcome stress for freelancers.

In light of these changes, if the government remains steadfast in its decision to enhance data collection in Self Assessments, it should commit to sharing this information anonymously. This not only ensures transparency but also aids in better policy formation and review.