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Why are we letting fundament reform of CT go through unchallenged?

Why are we letting fundament reform of CT go...

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Under our wonderful taxation system there is supposed to be consultation on fundamental changes but the Chancellor's announcement concerning changes to the treatment of dividends go much further without any consultation or meaningful discussion whatsoever!  Before 1973 our taxation system was a 'classical system' where companies were charged to tax and, if they paid dividends, as shareholders were taxed again. The Tories in 1973 made great play of the fundamental switch to an 'imputation system' so that as a basic rate of tax, corporation tax, was paid by the company the shareholder did not have to pay a basic rate of tax again, only an excess liability of the difference between the tax rate and the attached tax credit.  Whilst Brown broke the link between the tax credit and CT by abolishing ACT the system was still very much an imputation system.  This is significant in international tax as well as some double tax treaties provide for repayment of tax credits, even though normally they are not repayable.  Now, at a stroke, we have returned to the Classical form of CT without any discussion at all, and with it the cascading of liabilities!

For anyone receiving significant amounts of dividends this represents an increase of 25% or more in their liability and takes the effective rate of tax on company profits to rates in excess of the relevant tax rate.  So for a basic rate taxpayer (20%) the effective rate, because of the cascade effect of a classical system is now 26%! For a 40% taxpayer the effective rate is now 46% and so on.

This is a fundamental shift in the nature of our taxation system and surely deserves more information than two scant paragraphs in the Red Book which, at the moment, is all we have...

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Portia profile image
By Portia Nina Levin
12th Jul 2015 12:22

Yes but

That as over 40 years ago, when corporation tax was more than 50%

We are supposedly moving towards a corporate tax rate of just 18%.

Surely the way that dividends are taxed is an arcane (some might say archaic) and complex feature of the tax system :)

Who receives more than £5,000 of dividend income anyway?

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Replying to lionofludesch:
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By AlexLondon
13th Jul 2015 13:51

Pensioners relying on dividends

Portia Nina Levin wrote:

Who receives more than £5,000 of dividend income anyway?

 

Per the Red Book anyone with a share portfolio worth more than £140,000 is likely to be affected so probably a fair number of people......If you're elderly and don't have much of a pension then you may rely on dividend income to get by (not least as you would need huge amounts of capital to generate any worthwhile interest).    Not only will this lead to an increased tax liability but it will also lead to a compliance obligation and I wonder how many of that group will find it easy to comply with when in the past they had no filing obligation as basic rate tax payers. 

 

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Replying to heatonvences:
Red Leader
By Red Leader
13th Jul 2015 15:04

"fundament reform" (sic)

By the back door, perhaps?

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RLI
By lionofludesch
12th Jul 2015 13:16

Rod

We've made a rod for our own backs by paying low salaries and big dividends.

If dividends were a fair reward for your investment in the company, they wouldn't represent Wonga.com rates of return.

Personally, I think owner managed companies are fair game.  They've had it good for far too long.

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Replying to stepurhan:
Maytuna
By DJKL
12th Jul 2015 13:27

Long term

lionofludesch wrote:

We've made a rod for our own backs by paying low salaries and big dividends.

If dividends were a fair reward for your investment in the company, they wouldn't represent Wonga.com rates of return.

Personally, I think owner managed companies are fair game.  They've had it good for far too long.

 

I would not really disagree, having said that we play the game to the rules set by the referee, and he is fickle, so not sure blame attaches to us as such, our duty of care is to our clients advising them of their options within whatever rules we currently need to use.

On the positive side I can sort of see a hint of maybe the long awaited unification of tax and national insurance being a step closer, the change re dividends could be a step forward to that aim (maybe) but I would not yet read more into it than that; governments do so like to act the tease. However maybe the dividend tax changes are a first step in a five year plan (without tractors) to actually reform and simplify.(By making a bit more complicated first)

Or maybe I am being too charitable as to any politician's ability to comprehend the idea of long term planning?

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By Cloudcounter
12th Jul 2015 13:32

Investment income surcharge

When the imputation system was introduced, not only was there advance corporation tax, but we had an investment income surcharge of 15% and tax rates running up to 83% (possibly with the surcharge on top.)  The surcharge and rates above 40% were scrapped in 1979.  No doubt you led and outcry against this fundamental change to the tax system at the time.

With those changes, and the ever increasing impact of NIC, it eventually became effective for small businesses to incorporate and reward themselves through low salary and dividends.  The main difference between tax for self employment and owner managed business was the Class 4 NIC.

Moving the goalposts back towards where they once were is hardly a fundamental change in the system, and for some of us at least a change to raise more tax on dividends is hardly unexpected.

Personally, I've never understood why ACT was scrapped.  It would go a long way to making sure that companies declare and account for dividends on a proper bass

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Portia profile image
By Portia Nina Levin
12th Jul 2015 13:44

A little perspective

Outside the incorporated SME, who may well have incorporated for tax reasons, and who is probably saving NIC whether they did or not, others that receive dividend income are fairly well protected by the £5,000 allowance.

A basic rate taxpayer can get up to £5,000 of dividend income and still be in the same position, and how many basic rate taxpayers have portfolios generating dividend income in excess of £5,000.

A higher rate taxpayer needs dividend income of £21,667 or more ((£21,667 - £5,000) x 32.5% - £21,667 x 25% = £0.03) before they are worse off from the change. Now that's a massive share portfolio.

For an additional rate taxpayer the figure that figure is £25,251 ((£25,251 - £5,000) x 38.1% - £25,251 x 30.55555555% = £0.05). An even bigger portfolio.

Institutional investors are unaffected.

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By taxguru
12th Jul 2015 13:55

@paulsoper

Wasn’t this long expected?

With One-Man-Band Ltd becoming a reality early 1992 and given the contracting community ‘revolution’ HMRC tried everything possible, right from the press release in 1999, to stop the tax leak through the corporate form. From piercing the corporate veil through the disguised remuneration rules or legislating to plug every loophole involving onshore or offshore intermediaries or offshore employment trusts it was a constant tug of war. So much so that in one of the cases they successfully argued that the dividend was in fact remuneration (PA Holdings V HMRC). Yet dividend remained something largely out of their reach whilst the ‘industrial’ scale migration to the corporate form either by start-ups/the younger entrepreneurial minds continued.  One estimate puts One Man Band Ltds to number about 1.30 million and growing. On the other hand ‘employment’ taxes (income tax+NIC) account for nearly half of the country’s tax cake and HMRC’s eyes are clearly set on this part, to expand this base that is. At about 6 or 7% of the cake (with the likes of Starbucks abound) no one minds corporation tax being reduced to 10% even! So this change, as I see it, is here to stay but the only problem is that from 12,000-page long the legislation is likely to become 13000-page long soon!

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By Macey
12th Jul 2015 14:24

...and the eventual reporting of dividends

When it was revealed the tax return would be abolished in 5 years or so the feeling was that each taxpayers account would be pre-populated with various income.  Indeed HMRC already do this for state pension, they now have interest details (which are being checked against the returns for higher rate payers - I've had a couple of enquiries) and also have RTI info for payroll etc.

It therefore seems to me a move will be made  for all companies to report dividends when paid so that income can again be pre-populated.

More red tape for small business

 

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By Tonykelly
12th Jul 2015 23:21

predicted by quite a few people

I remember reading this article last year by Bill Dodwell, head of tax at Deloitte

https://www.accountancylive.com/dodwell-taxing-dividends

 

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By Matrix
13th Jul 2015 07:19

But Bill says that OMBs have saved income tax on dividends all these years, I disagree with this as a basic rate taxpayer suffered 20% and a higher rate taxpayer 40%.  It is national insurance which was saved through the low salary, high dividends model.

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By MBK
13th Jul 2015 12:57

And what happened to the Tory promise....

... not to increase income tax.

They can't be trusted any more than any of the alternatives!

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Replying to indomitable:
Portia profile image
By Portia Nina Levin
13th Jul 2015 13:03

That was not the promise

MBK wrote:

... not to increase income tax.

They can't be trusted any more than any of the alternatives!

They did not say they would not raise income tax, they said they would make a commitment not to raise income tax, which does not preclude them from raising income tax prior to making the commitment to not raise income tax. Pay attention!

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By MBK
13th Jul 2015 13:10

Silly me!

I'm sure the small business electorate realised all of that when they yoted Tory on the back of what the Tories said in public!!

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By ShirleyM
13th Jul 2015 13:33

Did Dave say ...

'No ifs, no buts, we WILL keep our promise' (re immigration).

If so, you can guarantee it was all spin, the same as usual. At least the EU allow him a little say in taxation, unlike immigration.

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By The Innkeeper
13th Jul 2015 15:27

Stop whinging
Boys and girls. I agree with paul. It could have been worse he could have introduced ni on close company dividends

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