The Budget 2008
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Welcome to the second of this year’s Budget bulletins
Last week we set the scene: this week we want to look in a little more detail at what the Chancellor may do about business tax.
Andrew Jupp, National Head of Tax sets the scene. “We think that most people would agree that our current system for taxing small businesses is a mess! The amount of tax that a business pays on its profits can vary widely depending on the structure of the business and the way in which profits are withdrawn. We analyse this further below”.
Let’s start with an obvious example: dividend income is taxable at lower rates than employment income and there is no employer’s NIC charge on a dividend. The result of this is that, even though the dividend is not deductible in computing corporation tax, the overall tax burden is usually lower if profits are extracted in dividend form.
Over the years the Government has had several attempts to deal with this issue, most of which have not had any real effect other than to increase the complexity of small business compliance – some of you will remember the infamous Non Corporate Distribution Rate which came and went in the space of a few years. This year we can look forward – if that is the right expression – to the new Income Shifting rules which are designed to ensure that the taxation of dividend income (or partnership profits) is related to the contribution that each individual makes to the business. One of the things to watch out for on Budget day is whether or not there are any changes to the draft rules which were published a few weeks ago. We certainly hope so, because in their present form we believe that legislation is unworkable.
At some point the Government is going have to tackle the underlying issue rather than come up with sticking plaster solutions. So we will be looking for any hints about the Chancellor’s longer-term thinking. Charging NIC on dividends paid by family companies would certainly create a more even playing field, though it would of course trigger a huge outcry from small businesses. In any case it would be almost impossible to come up with a way of defining which companies would and would not be within the rule. So we don’t think that this approach is likely.
What we do think may happen is a gradual abolition of the small company rate.
Andrew Hubbard, National Tax Technical Director comments: “When I started my career in tax the main rate was 52% and the small company rate was 30%: Now the rates are much closer - from 1 April the figures are 28% and 21% - and we already know that the small company rate will go up to 22% next year. So the trend towards convergence is clear and I expect that within a few years the small company rate will have gone completely and that all companies will pay tax at a single rate, which might be something like 26%. Increasing the small company rate significantly reduces the advantage of taking profits by way of dividend rather than salary, and it may well be that the Chancellor would prefer a gradualist approach rather than take the risk of the adverse publicity that an immediate increase in small company tax would unleash.”
We’ll also be looking out for two other announcements.
The first is to do with associated companies. Most people are aware that where companies are under common control there is a reduction in the small company rate threshold. This is designed to stop people deliberately fragmenting businesses in order to obtain a tax advantage. In practice, however, the rules operate in an arbitrary basis and catch situations – such as involvement in film partnerships – where investors whose businesses are technically under common control may well have no knowledge of the existence of those businesses and yet still have to take them into account when computing their corporation tax liability. We hope that we are going to get a more sensible set of rules here, so that it is only actual cases of business fragmentation that will be caught.
The other is administration burdens. The Government is committed to reducing the admin burdens that the tax system places on business and we have no doubt that its desire to do this is genuine. Of course in practice everything seems to go the other way, and even measures which are intended to simplify matters always seem to end up creating additional burdens. So we expect that the Chancellor will make lots of references in his speech to reducing admin burdens, but we will be looking very closely at the small print to see whether or not the intention is actually translated into practice. History is not on the Government’s side here, but perhaps this year things will be different…….
Next week we will look at some issues affecting personal taxation
And finally
Continuing our look back a hundred years we find that the total amount of tax revenue that the Government collected for 1908-9 was £96 million and the standard rate of tax was one shilling in the pound! It truly was a different world.
Andrew Jupp
National Head of Tax
Andrew Hubbard
National Tax Technical Director
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