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Budget implications for small limited companies

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22nd Mar 2013
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In spite of measures to help small business, the Chancellor left contractors frustrated by the lack of any Budget day clarification on IR35 “office holders”. Nick Huber sifts the Budget paperwork and online discussions to assess the overall pros and cons for small limited companies.

Small businesses were among the most obvious winners from Wednesday’s Budget, which included a reduction in employer’s national insurance bills and a scrapping of stamp duty on shares trades on the Alternative Investment Market.

There were also measures to improve the supply of funding to SMEs – such as extending the capital gains tax exemption under the Seed Enterprise Investment Scheme (SEIS).

The Treasury document setting out the £2,000 Employer’s allowance explained that every business will be able to employ one worker on a salary of £22,400, or four employees working full time on the adult National Minimum Wage, without paying any employer NICs at all.

AccountingWEB member jonbryce gave the measure a cautious welcome: “If you are a one-person limited company with only the director/shareholder as an employee, it will make it worthwhile paying a salary between the NI threshold and the personal allowance,” he said.

“But above that, it will still be cheaper to pay dividends.”

Brian Barrett added that the NI cut will not encourage an employer to suddenly take on one more person, but may “tilt the balance” for someone thinking about it or “is thinking about not replacing someone or getting rid of someone”.

But mwangishah was positively suspicious about the NIC tax break for one-person businesses: “A few years ago, self-employed people were given the chance to incorporate with the first £10,000 not being charged to CT. Once people incorporated allowance was taken away. Suspect that this may be to get the possible IR35 companies to start paying wages and then catch them in the future.”

Although several members complained that once again the government’s incentive seemed to add an unwelcome element of change and complexity, chEEK saw the employment allowance as a step in the right direction towards eliminating employer’s NI. If the thresholds continue to increase - or even align with the income tax personal allowance - then there may come a time when it can be abolished, chEEK argued.

“By the time it gets to around £10-20k it will cover most SMEs and may remove the complications in one-man band SMEs where dividends are attractive/essential to avoid a double taxation issue (and one that was rather brainlessly foisted onto even more one man band outfits by the advent of IR35). Expanding this far enough could provide the solution to that problem, albeit in a typical governmental tinkering way, adding complexity to arrive at fairness.”

Contractor confusion

But freelance workers, who were waiting for the government to clarify changes to IR35 tax rules, were left disappointed that the Budget did not answer their calls on that score.

Having climbed down from introducing a raft of complex controlling persons rules in December, the government has said an amendment would be brought forward in the Finance Bill 2013 stipulating that any office holder or controlling person integral to the running of an organisation should be taxed at source by the body they work for, rather than being paid as a company.

A Budget 2013 document said that the issue will be clarified in the Finance Bill, which is due to be published on 28 March.

Another Budget announcement indicated that the government plans to remove the presumption of self-employment for limited liability partnership (LLP) partners to prevent people using partnerships to avoid tax.

This anti-avoidance measure may create new tax complications for contractors, warned Martin Hesketh, managing director of Brookson, an accountancy firm which specialises in advising contractors and freelancers.

“We would urge the government to ensure legislation doesn’t have an adverse effect on other freelancers and contractors, and avoid the furore around last year’s controlling persons announcement,” he said.

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Replies (9)

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By Ian McTernan CTA
25th Mar 2013 12:21

Adopt the Irish model

From my understanding there is no employers NIC type liability on payments made to directors and controlling shareholders In Ireland and hence no tax saving between paying out salary or dividends from an Irish company.  It's kind of like a reward for running your own company, as the money is yours.

Hence they don't have this crazy system with upteem layers of complexity.

Maybe the 'tax simplification' people could knock some sense into HMRC and seriously look at changing the whole tax system so it rewards people who genuinely run their own company.

IR35 was such a bad idea and rather than abandon it and introduce a simple 'employment' test along with using the GAAR they keep wanting to throw more legislation at it.

Thanks (1)
Replying to raju m:
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By pgm2tsc
26th Mar 2013 00:05

hear hear!

hear hear Ian McTernan!

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Replying to raju m:
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By david5541
15th Apr 2013 15:42

irish model-nhs and employers' NIC

The irish dont have the NHS so where-ever possible flock to the north to claim some connection with the uk along with so many other "health tourists" who come here and receive the luxury of our NHS...

(never mind all the young girls who have to come here to get a termination) 

This is paid for by NIC but to make NIC costs for small employers LESS is a 1/2 way house measure- we should be removing the cap on NIC after all there is no cap on income tax. is there?

tinkering thats all the budget did....

Ian McTernan CTA wrote:

"From my understanding there is no employers NIC type liability on payments made to directors and controlling shareholders In Ireland and hence no tax saving between paying out salary or dividends from an Irish company.  It's kind of like a reward for running your own company, as the money is yours.

Hence they don't have this crazy system with upteem layers of complexity.

Maybe the 'tax simplification' people could knock some sense into HMRC and seriously look at changing the whole tax system so it rewards people who genuinely run their own company.

IR35 was such a bad idea and rather than abandon it and introduce a simple 'employment' test along with using the GAAR they keep wanting to throw more legislation at it".

 

 

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By dwgw
25th Mar 2013 13:03

Knocking sense into the right party

Interesting idea Ian, but the government of the day is the only one that can change the tax system.  HMRC simply does as successive governments bid.

We seem to have a "grass is always greener" view of the Irish tax system.  Perhaps that's justified although my only recent experience of it involved family members paying capital acquisitions tax of nearly €26k on inheriting an estate worth about €185k.  Be careful what you wish for!      

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7om
By Tom 7000
25th Mar 2013 13:48

employees Nic

dont foirget that.....

 

All it means is Directors salaries go up to the tax free band as ees ni is less than CT

 

come guys keep up

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Morph
By kevinringer
26th Mar 2013 15:42

Ian's suggestion is interesting ...

... but if I was in Government I would chose to level the playing field the other way by introducing NICs on small/close company dividends!

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By pauljohnston
02nd Apr 2013 17:47

@kevinringer

But why

Small companies are the life blood of this country.  If you tax dividends as employment income you remove any incentive to take risk.

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Replying to Maslins:
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By NeilW
19th Apr 2013 11:27

The incentive to take risk is embedded in the large fees charged by the business for the service.

If you can't get those larger fees, then you need to get a proper job.

 

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7om
By Tom 7000
02nd Apr 2013 18:08

what paul johnston said

If I thought I had to pay 45.8% tax ie it +ers nic +ees nic at the low rate and then 55.8% at a higher rate rather than the 20% that I pay now, I wouldn't bother

 

a) Working past 4.30

b) Acquiring other firms of CAs

c) Employing staff

 

Indeed, All I would do is build up tiny firms of CAs over a 1 year period and sell them to you boys and pay 10% CGT until I had used up my £10 m ER allowance, well either that or retire

Thanks (2)