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In a bid to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company, the government is likely to charge National Insurance on dividends from close companies, that is, those companies with five shareholders or fewer.

In his Pre-Budget Report on Wednesday 10 December 2003, the Chancellor of the Exchequer sent shivers through the ranks of UK small businesses with the announcement of "specific proposals ... to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company". The proposed measures were outlined in paragraph 5.91 of the Pre-Budget Report 2003, in a chapter entitled "Building a Fairer Society", hence the coining of the term "IR591".

Whilst the Pre-Budget Report 2003 does not outline the proposed measures in any detail, it does refer to Government concerns about "the longstanding differences in tax treatment between earned income and dividend income." The proposed implementation is likely to involve charging National Insurance on dividends from close companies, that is, those companies with five shareholders or fewer. It is not yet clear what rate would be applied, how corporate shareholders would be treated, or whether entitlement to NI-related benefits would be endowed.

This could be one of the most significant tax proposals for many years, resulting in much larger income tax and national insurance bills for small business owners. The Federation of Small Businesses believes that any changes could potentially affect 300,000 businesses.

Experts say that the impact could be far greater than IR35, and that it will raise over 1bn in extra tax for the Government.

Most small businesses take a large proportion of their profits as dividends, which has been advantageous as there is no national insurance on them. Anne Redston, Tax Partner at Ernst & Young, said, "This is the bombshell of this pre-Budget, because it could affect so many ordinary people - from fish and chip shops to window cleaners."

Read more at www.ir591.org.uk

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