Nasty tax shock awaits SMEs in next Budget

Link: Pre-Budget special

Paragraph 5.91 of the pre-Budget report outlines the government’s determination to clamp down on small incorporated businesses which extract profits from the company in the form of dividends.

‘The government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals’ tax liability,’ the report said.

‘The government will therefore bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company.’

The move will infuriate incorporated business owners who were persuaded to incorporate in order to take advantage of preferential tax treatment such as a zero tax rate on earnings below £10,000.

‘It could be that this is the rabbit punch that some feared,’ said John Whiting, tax partner at PricewaterhouseCoopers. ‘The Revenue was saying “don’t be a sole trader, get legitimate and incorporate, and you’ll receive preferential treatment”. And then suddenly it’s “right, gotcha”.’

He went on to say that the paragraph could have as far-reaching consequences as the Revenue ditching controversial legislation such as IR35 and S660A in favour of an all-encompassing tax rule for small companies.

The Inland Revenue has yet to clarify exactly what form the clamp-down will take.

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