INDIVIDUALS who try to flee the stress of urban life by “downshifting” and moving to the countryside could be the next target for the taxman.
The Government is drawing up plans to increase national insurance bills for people who leave employment to run small “lifestyle” businesses, The Times has learnt.
The measure, expected to be outlined in a consultation paper, follows growing Treasury concern about the loss of revenue caused by the fashion for downshifting.
But there are fears that the legislation will be a blunt axe that will end up clobbering traditional self-employed tradespeople such as plumbers, electricians and hairdressers.
Self-employed individuals pay national insurance at a lower rate than the employed; 8 per cent instead of 11 per cent.
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In a double whammy for the Treasury, the taxman also loses national insurance paid by employers for each worker, at a rate of 12.8 per cent.
Ministers’ particular aversion to “lifestyle” businesses is the lack of contribution they make to the economy: in general they are run from home, with no employees and the owners often have no ambitions to grow them into large companies. There are an estimated 500,000 such businesses in Britain.
Though the plans are still being drawn up, it is understood that officials aim to penalise these micro-businesses by increasing the national insurance they pay by 1 or 2 per cent. The measure could raise millions of pounds of revenue. It is understood that the scheme could work by imposing the rise on those companies that fit criteria denoted by turnover or profit. It could catch all manner of self-employed people in the net.
The move would be the latest in a string of attacks on the small company sector by the Treasury. It recently closed what it called a “loophole” in the law forcing small companies to pay 19 per cent on profits extracted from their companies.
The Inland Revenue has also started to use an ancient piece of legislation, the Settlements legislation, to target husband-and-wife businesses, which it believed were not paying enough tax.
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In the March Budget the Chancellor said he wanted to ensure that all small companies and self-employed people were paying the “right” amount of tax. But accountants argue that it would be virtually impossible to distinguish between “lifestyle” businesses and those the owner intends to grow into a large business employing hundreds of people.
They fear another confused piece of legislation similar to IR35, the tax that aims to reclassify self-employed people as employees, which has left many individuals uncertain of their status.
Accountants and groups including the Federation of Small Businesses and the Institute of Directors have tabled a meeting with officials and accountancy firms this month to lobby against the plans and to warn the Chancellor that any changes to the small business taxation system should be made only after detailed consultation with the sector.
John Whiting, a partner at accountants PricewaterhouseCoopers, pointed out that while there are tax advantages for the self-employed over employees, they also receive fewer benefits and have to take more risks emotionally and financially than employed people. “All this seems to be forgotten,” Mr Whiting said.
Britain, which with Italy has a long tradition of artisanship, leads Europe in self-employment.
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Self-employed people pay Class 4 national insurance at 8 per cent on profits between £4,615 and £30,940. Above that profit level, a rate of 1 per cent is charged. The self-employed also pay £2 a week in Class 2 contributions. So a business making £50,000 profit would pay £2,291 national insurance a year.
Business groups said the measure could damage seedcorn for future businesses and deter individuals from going it alone.
Many multinational corporations rose from humble roots. Google, the Internet search engine begun six years ago in a student’s dorm room, has just been floated for $1.67 billion.