Inland Revenue has proposed a bonkers new tax on small business

When the Government announced its new 39% income tax bracket, we warned that high earners would simply shift income into companies and trusts.

David Parker eventually cottoned on to this problem and asked Inland Revenue to investigate ways to crack down. Now Inland Revenue has been quietly consulting on a set of proposals that are – frankly – bonkers.

•  Inland Revenue has proposed whacking most small business owners with a tax on retained earnings (i.e. profits reinvested in a company) if they sell their shares. Those earnings have already been taxed at the company tax rate of 28%, but Inland Revenue has suggested an extra tax on upon the sale of the business to make up the difference between 28% and 39%.

•  Next, and even worse, Inland Revenues proposes severely limiting which businesses will be eligible for the 28% company tax rate. A business owner who provides more than 50% of his or her company's services would now be denied access to the 28% company tax rate, even if they have dozens of clients.

To add salt to the wound, big publicly-listed companies will be exempt from these tax hikes. As our tax advisors put it, "Inland Revenue is aiming for the kings but shooting the peasants".

The full details of the proposals are actually even worse than we have space to describe here – they are extremely complex and can result in more tax payable compared with if there was a full capital gains tax. If you're interested you can read our formal submission on the proposals here.

Inland Revenue is not taking further submissions, but we understand that having read our submission and those of other experts, officials are now tearing their hair out over the mess they made of the recommendations.

We're optimistic there will be a backdown. If not, we will ensure these proposals cause a world of political pain for Labour as a disproportionate tax on small business, and another breach of the "no new taxes" promise.