Writing for Tax Journal, BKL tax partner David Whiscombe examines how the Summer Budget was mixed bag for owner-managed businesses.
Although it is the benefits cuts which have made the headlines, the Budget statement includes a number of changes particularly affecting owner-managed businesses, some welcome and some less so.
In parallel with cuts to tax credits, a new national living wage is introduced. Starting at £7.20 from April 2016, it will rise to £9 by 2020. It is estimated to cost employers, as a whole, 1% of profit; and it’s compensated by a reduction in the rate of corporation tax to 19% in 2017 and to 18% in 2020. Large employers will also have to contribute to a training levy, which will provide a fund to assist financing apprenticeships. This looks like a modest but welcome transfer of training costs from small firms to larger ones. Smaller businesses, in particular, will also welcome the decision to retain the annual investment allowance at a permanent level of £200,000 per year. It means that for many businesses, all capital expenditure on plant and machinery will be fully relieved in the year of acquisition. Smaller organisations will also especially benefit from the increase in the employment allowance to £3,000 from April 2016 (equivalent to NIC on four full-time employees on the national living wage), though the allowance is withdrawn altogether from companies where the director is the sole employee.
HMRC has long been tetchy about ‘tax-driven incorporation’, especially of one-man businesses. Where two otherwise identical businesses are carried on, one as a company and one as a sole trader, the tax and NIC payable by the two can be very different. Imposing NIC on dividends is technically difficult, so Mr Osborne has solved his problem a different way. In future, dividends will carry no tax credit. There will be an annual exemption of £5,000; and dividends in excess of that amount will be taxed at 7.5%, 32.5% or 38.1%, depending on whether the shareholder is a basic, higher or additional rate taxpayer. It will not increase the tax payable by holders of modest portfolios of quoted shares; indeed, in many cases it will reduce it. But it will make trading through the medium of a company less attractive, though not terminally so, and is slightly compensated by the reduction in the rate of corporation tax to 19% from 2017 and to 18% from 2010. The change comes in from April 2016. Company owners may wish to consider taking accelerated dividends before then.
The pre-election Budget in March changed the rules on amortisation of intangible assets to deny relief for goodwill and similar assets acquired from related parties. So it is slightly odd that, just a few weeks later, the Summer Budget should now extend that denial to all acquisitions of such assets taking place after Budget Day, regardless of the identity of the person from whom the acquisition is made. Indeed, it seems even odder that it should have taken the government 13 years to have worked out that the intangible asset regime created what is now described as a ‘distortion in the market’ by affording more favourable tax treatment to the acquisition of assets than to that of shares. One wonders which of today’s tax reliefs will be tomorrow’s ‘distortions’.