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PBR 2008: The incorporation question. By Rebecca Benneyworth

26th Nov 2008
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The announcement that the planned increase in the small company rate of corporation tax was to be deferred for a year was welcome news for smaller businesses. However, this brings back to the fore the issue about the best legal structure for a smaller businesses, and what the tax issues have to offer.

It is fair to say that since the 19% small company rate moved up to 20% in 2007, the writing has been on the wall for very small companies. Looking only at the tax issues, the continued erosion of the income tax burden at the bottom of the income scale reduces the tax benefits provided by incorporating, as it is income tax that is the more expensive on taxable profits (when NIC is taken into account, and profits are extracted largely as dividends). By reducing the higher tax burden, naturally the results are brought closer together and the benefits start to be outweighed by the costs.

Freezing the rate at 21% for another year really has minimal effect in comparing the tax burden between self employed and limited company, and in fact the hike in personal allowances has more impact on the relative tax burdens, reducing the income tax charge still further. The picture is still one of reducing tax benefits obtained through limited company status. For businesses with profits of £10,000 to £15,000 the tax saving is of the order of £300 to £500.

Advisers will need to consider their advice carefully to ensure that clients are aware that the benefit of incorporating for tax purpose has largely come to an end, and when the accountancy fees and other increased administrative costs (including bank charges and interest on borrowings) are taken into account, many clients will be worse off as limited companies. While 12 months ago that outcome suggested to me that very small businesses should be looking to disincorporate, the current economic climate gives me pause for thought. Is now the right time to be doing away with limited liability? While the benefits of limited liability are themselves limited for small companies, there is still some shelter available if the absolute worst happens.

And what better summary of the position could there be than that. We have returned to sanity where the decision to incorporate is not driven by a temporary tax benefit (of agreeably large proportions!) but by a review of all of the issues involved and the provision of good sound business advice to our clients.


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26th Nov 2008 16:58

Tax motivated incorporation
@ Rebecca

We shouldn't forget that the increase in small business corporation tax was motivated by the Government's belief that the incorporation of IT consultants is driven by their desire to reduce their tax burden However, the reality is that the market place will not allow us to trade as sole traders as both clients and agencies alike want to protect themselves from unpaid tax bills that might be incurred as a result of a sole trader going into liquidation. So having been obliged to incorporate, naturally we will enjoy the benefits.

Similarly, the desire to introduce the family business tax is also driven by the numbers of "non genuine businesses" i.e. IT consultancies, which take advantage of the provision.

HMRC has tried and failed with IR35 to attack IT consultancies and will continue to fail with its ideas if at the root of the regulations, is the desire to target one community, i.e. IT consultancies.

It has to be said that the small business community at large was disinterested in IR35 because it did not affect them. However, the family business tax did and so there was the inevitable uproar. HMG must accept that it is unlawful to target a particular community for taxation and must accept that IT consultancies are genuine businesses.

I will maintain very strongly that I run a genuine business. Anecdotal evidence has it that the average lifespan in Wales of a small business (of any type) is about 5 years (I will stand to be corrected with hard evidence). I have been in business for 12 years and have not taken any Government subsidies.

Contrast this with schemes which offer startup incentives and employment incentives, which clearly are lost if "genuine" businesses close within 5 years. I have close family experience of a company going into liquidation, holding cash back for repurchasing equipment from liquidators and starting up again whilst failing to pay HMRC the outstanding tax. So who is the "genuine" business?

It's issues like this that the mandarins in their white towers are un aware of, or wish to ignore. I'll keep saying it I run a "genuine" business which pays its taxes in full and on time and takes no Government subsidies.

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