After the budget are you feeling hard done by?
At least you won’t be taxed twice – unless you run a business.
In amongst the winners and losers from yesterday’s budget one group seemed to have slipped under the media’s radar.
Hundreds of thousands of small business owners will now be taxed twice on the same profits.
For many years the logic has held that small business profits should only be taxed once – through corporation tax and not taxed again if dividends are paid out. The chancellor changed the rules yesterday and from April any shareholder that receives more than £5000 in dividends will find that the same profits will be taxed again at a starting rate of 7.5%.
The government has offered some explanation pointing to ‘Tax Motivated Incorporation’ as the target. This means that they want to stop the practice of setting up limited companies specifically to avoid tax. It is currently common practice for contractors, care workers and others to set up companies in which they are the only employee in order to pay less.
Several years ago legislation known as IR35 was brought in specifically to address this issue and the announcement yesterday signals the complete failure of HMRC to implement and police IR35 over recent years.
By proceeding as the government has, it has tarred the genuine small business community with the same brush and punished them for maintaining investments in their own business. The proposed cuts in corporation tax will not offset these changes and will not occur until 2017 and 2018.
Let’s hope the pain felt by small business owners has not damaged growth by then.
Nick Bonnaud ACMA
Quest Chartered Management Accountants