Tax hits loom for owner-managers

Small businesses face a potential double tax hit at the end of the month, as
changes expected in the pre-Budget report combine with the ongoing Arctic
Systems row to raise their prospective tax burden.

The pre-Budget report is expected at the end of the month. Chris Sanger, tax
partner at Ernst & Young, is predicting that changes in the treatment of
owner-managed businesses could hike tax bills by 15%.

‘Last year, the government announced a discussion paper into the differences
between self-employed and incorporated owner-managed businesses. The Treasury
expressed the view ­ a wrong one, in my view -­ that differences between the two
should be tax-neutral,’ Sanger said.

That discussion has now come to a head, and Sanger believes the Revenue will
move to ensure the two types of business are tax-neutral.

At the moment, individuals can incorporate their business, reducing their tax
liability by paying themselves a large dividend and avoiding employers’ national
insurance contributions. Sanger thinks the government will start treating such
dividends as salary for tax purposes.

Around the same time the pre-Budget report appears, the Arctic Systems case
against HMRC will come before the Court of Appeal, on 29 and 30 November. The
small technology consultancy paid Geoff Jones a lower rate while paying a higher
dividend to his wife, who also worked in the business, to maximise the use of
available allowances.

About 300,000 businesses are thought to be structured in a similar way to
A spokeswoman for the Professional Contractors Group said that if the two dates
clashed, it would ‘add to the uncertainty for thousands of small businesses’.

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