TaxCorporate TaxSMEs face tax ‘sledgehammer’ threat

SMEs face tax 'sledgehammer' threat

Hundreds of thousands of small businesses face a torrid 2004 after the government hinted at a clampdown on the tax affairs of incorporated businesses.

Link: Nasty tax shock awaits SMEs in next Budget

Paragraph 5.91 of the pre-Budget report offers a daunting taster of what could come, saying that the government will ‘ensure the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company’. It is expected that the government will introduce a tax on dividends.

Neil Hamper, chairman of the taxation and financial affairs committee at the Federation of Small Businesses, said: ‘(Brown) darkly alluded to people not paying their fair share of tax. I suspect it’s going to be another lot of bureaucratic interference by putting in a sledgehammer to crack a lot of small nuts.’ The move will infuriate business owners who were persuaded to incorporate to take advantage of preferential tax treatment.

‘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 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 Revenue was unable to confirm what form the clampdown would take, saying only that ‘in the case of these individuals, the distributed profits of their company and their personal income are inextricably linked’.

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