PBR 2007: Small business taxation. By Nichola Ross Martin
Poor old small business! The Pre-Budget Report does not give much encouragement to do anything other than sell up, it seems. Where did things all go so badly wrong?
We all know that the root cause of the anti-small business strategy lay in the introduction of the 0% starting rate for corporation tax. This positively encouraged enterprise as the resultant rash of incorporations amply illustrated. Unfortunately, these were illustrative of the wrong sort of "enterprise" and it was unlikely that any chancellor to continue commending such tax breaks to the House. The irony being that the best thing about a 0% rate was its simplicity!
The outlook for small business taxation remains relatively uncertain; all we do know is that small company tax is going up again.
Fundamentals
A consultation exercise has been announced following "Arctic Systems" to combat "income splitting" of dividend income by couples, and this extends to partnerships, where couples try and split profits too, it seems. We are assured that this will not affect employment income, so it seems prudent to employ your spouse instead.
Simplification of unincorporated business is still also under review, and so we can expect some further debate in this area.
New taxes
"Supplementary business rates" will be a new local business tax, levied by local authorities; these will be in addition to new Planning Taxes which local authorities can also impose. Rather bad news if you have a business premises or want to do any building works. Different local authorities will we assume be able to impose different tax rates which might be unfair, depending upon where you are based.
Capital Gains Tax
If you are thinking of retiring, do not delay! Following the announcement of Capital Gains Reform you may want to sell your business before 6th April 2008. You will save at least 8% in tax, but maybe more if you were relying on indexation relief.
If you are lucky enough to have the support of a "sleeping partner" they may decide that it is time to liquidate their investment before the new rules cut in.
Alternatively, if you are a sole trader or partnership it might be worth incorporating just to trigger a gain. There is rather more to CGT reform than meets the eye.
Associated companies
A review has at last been announced on how the corporation tax rules for related (we assume this means “associated” here) companies might be simplified.
The thought does cross one's mind that perhaps "related" does not mean "associated", and if so, then no one knows what they are talking about, which is slightly worrying. However, on the proviso that the Chancellor does mean "associated" companies, and someone has just made a bit of an error (possibly as they are not familiar with the underlying problem), then tax advisors who have been campaigning for this over the past few years will be encouraged by the announcement.
On previous occasions it has been claimed that there are too many anti-avoidance issues at stake and too much legislation to amend to change the associated company rules. One solutions could be to just start with a rewrite of the set of riddles that define "control".
Tax rates
Gordon Brown announced last March that the for 2008/09 the small company corporation tax rate will be raised in stages increasing to 21% in 2008 and 22% by 2009.
Marginal rates still kick in at £300,000, and the fraction is 1/40.
Pre-Budget Report 2007: At a glance guide
Pre-budget coverage sponsored by
You might also be interested in
Replies (2)
Please login or register to join the discussion.
Related may come from Sch 28AA
I assume the reference to "related" companies corresponds to the term as used in the transfer pricing rules in Schedule 28AA. Perhaps this indicates an intention to use this as the measure of "association".
It's a question of interpretation...
Labour wants to be seen as friendly to business but interprets this a BIG business hence the helpful proposals made by David Varney which are being implemented - of course as long as your transaction is valued at more than £250m.
But Labour abdicated all control over the revenue service some years ago preferring to allow it to root out evil avoidance wherever it could be found - and of course its much easier to hit small taxpayers who don't have the resources of Cadbury Schweppes or Marks and Sparks hence the revenue enthusiasm for countering the perceived abuse by companies like Arctic Systems, aided and abetted by an incredibly traditional and blinkered approach by the House of Lords which simply (it seems) accepted without question that there was a settlement in this case but allowed the taxpayers to win on a technicality which the revenue now seek to counteract even though there is clear evidence that the government who introduced independent taxation intended that income splitting should occur. That should be sufficient for the revenue - the government that introduced the legislation intended that income splitting should occur. Accept it. If you want to change it accept that that is a change of policy and persuade the government to introduce it as such with justification. That is the fair way. But Labour don't behave like that - they give HMRC the freedom to do whatever they want, as they (Gordon) abdicated control of the economy to the Bank of England who acted so admirably over Northern Rock.
Small businesses are seen as a nuisance and little more - mark my words the writing will be on the wall when Gordon Browns hand moves Alistair Darlings mouth to form the words "I've appointed a Tsar to protect small business interests" - nooooooo!