Budget fears end rush for incorporation

Link: Nasty tax shock awaits SMEs in next Budget

According to figures obtained from Companies House, an average of 1,500 business were incorporating every day through the middle of 2003.

But this is now likely to have slowed to a trickle as evidence mounts that advisers are telling their clients to hold off until after the Budget announcement in March.

Experts are hoping that the chancellor will use his speech to clarify paragraph 5.91 of his pre-Budget report, which was widely interpreted as a clampdown on businesses using incorporation to reduce their tax liabilities.

Incorporation gives owner-managed businesses £10,000 of profits tax-free, a fact which is said to have concerned Gordon Brown because it may be costing the exchequer up to £1bn in lost tax revenues.

There were 225,000 incorporations in 2001/02 but after the launch of the tax break the figure rose 43% to 322,000 for 2002/03. The first six months of 2003/04 has already seen 206,000 incorporations, according to Companies House.

Bruce Lawson of Montgomery Taxation Services said he had advised ‘several’ clients to ‘defer’ the start date of incorporation until the government provided further clarification.

Anne Redston, tax partner at Ernst & Young, confirmed that her firm is also advising clients to wait and see what the chancellor will reveal come 17 March.

The situation drove members of the profession to organise a high-level meeting last week with officials from the Department of Trade and Industry and several tax bodies and industry lobby groups.

Inland Revenue representatives also attended but were instructed only to ‘listen’ to proceedings.

The Revenue has refused to comment any further on the situation.

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