TaxCorporate TaxSmall companies tricked into tax trap.

Small companies tricked into tax trap.

When chancellor Gordon Brown introduced his zero-rate of corporation tax on companies with profits below £10,000, many professional tax advisers smelled a rat.

The measure was described in the 2002 Budget as a means to ‘promote entrepreneurial spirit and support new business startups’. The more cynical among us saw it as a way to gain greater control over small businesses’ tax matters.

What better way to do so than with the lure of tax-free earnings? It was a point not lost on paymaster general Dawn Primarolo.

‘Surely small businesses will do that,’ she said during a House of Commons questions and answer session in 2002.

She was right. Small businesses were never going to look a gift horse in the mouth, as the government knew only too well, and since the announcement there have been almost 600,000 incorporations.

But Anne Redston, a tax partner at Big Four firm Ernst & Young, describes the measures not as a gift horse, but as a ‘Trojan horse’.

Only now will recently incorporated small businesses begin to understand exactly what they have got into.

Saddled with a huge increase in compliance burdens – and the prospect of penalties if those burdens aren’t adhered to – small companies are on the brink of having all the incentives that made the burdens worth carrying pulled out from under their feet.

And that’s not the bad news. Now the government has small companies where it wants them, Brown is likely to keep them there.

In order to disincorporate, companies must pay capital gains tax on their assets. It is one expense too far for small companies, which have had to deal with a minefield of attacks over the past couple of years.

Section 660A, IR35 and now the notorious paragraph 5.91 have all taken their toll in terms of uncertainty and fear. Indeed 5.91 takes the uncertainty to another level.

It has led ACCA to ask the chancellor to provide a ‘proper and fair route to tax-free disincorporation’ in his March Budget. I for one, won’t be holding my breath.

  • David Rae edits the tax page.

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