What is IR591?

The Chancellor of the Exchequer gave a Pre-Budget Report on Wednesday 10 December 2003 that alarmed 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 Proposal:

The proposals were sketched out in paragraph 5.91 of the Pre-budget Report 2003, in a chapter entitled 'Building a Fairer Society'; hence the term IR591.

The Government clearly had concerns about "the longstanding differences in tax treatment between earned income and dividend income".

The proposed IR591 legislation was likely to involve charging National Insurance on dividends from companies with less than five shareholders.  This would result in much larger Income Tax and National Insurance for small limited company businesses.

Transcript from Paragraph 5.91

The Government has introduced a range of measures and targeted tax reductions to support small businesses; including through reform of capital gains tax, reducing the rate of corporation tax for smaller companies and the introduction of zero rate, Stakeholder Pensions, and the abolition of advance corporation tax.  These measures are encouraging the creation of more small companies, including through self-employed people incorporating their businesses.  The Government is keen to ensure the measures it has introduced provide support for these firms taking on the opportunities and responsibilities involved in that transition, and to encourage them to reinvest their profits and grow their businesses.  At the same time, the Government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals' tax liability, and that support should continue to be focused on growth.  The Government will therefore bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company, and so protect the benefits of low tax rates for the majority of small businesses.

The Actual Legislation

The media hype and concerns raised over section 5.91 in the Pre-budget speech became something of a damp squib when the measures were announced in the 2004 Budget.

Effectively, the Chancellor simply removed the advantage of the £10,000 zero rate tax band for limited companies that distributed all or the majority of the company's profits to its shareholders.

In real terms this means that a company will probably pay an extra £1,900 per annum in tax (£10,000 x 19%); and will still mean that those who have incorporated will be better off tax wise at a lower profit level than if they were sole traders.