In the classroom: bad news for small companies

This prompted the ‘great incorporation rush’ as companies realised the major
tax advantage over remaining self-employed. However, after the 2007 Budget’s
corporation tax increase, the use of small companies for tax benefits has become
less attractive and many financial professionals will be asking whether
companies should continue with a corporate structure.

With this in mind it appears that tax advisers and their staff should use
their CPD hours wisely and make sure they are fully up to speed on all aspects
of business taxation, enabling them to advise clients on the ways, outside of
incorporation, tax savings can be made.

With the end of the 0% corporation tax rate last year, small companies are
now facing similar rates that were in force in the late 1990s. The rate was 19%
up to 31 March 2007, 21% for the year ended 31 March 2009 and 22% for the year
ended 31 March 2010. And there are hints that even this may not be the end of
the story, as the Budget book states that ‘the government will continue to
monitor the level and extent to which labour income is extracted in dividends’.

In the days of the incorporation rush, clients who went for a company
received a double bonus: a saving in national insurance contributions plus a
saving in tax on income. We are now moving into territory where there is still
an NIC saving, but this is offset by an increase in tax on income. In some cases
the net saving will do little more than cover the additional compliance costs of
a company structure.

Finance professionals already involved in advising clients on the most
efficient tax savings will be keeping up to date with what is happening. Yet,
relevant CPD training is invaluable not only in ensuring financial professionals
understand the technical workings of corporation tax but also to give financial
professionals the confidence to advise companies on the best approach for their
business.

The incorporation saga has some way to run and other Budget developments ,
such as the attack on managed service companies and changes in capital
allowances, will affect the balance of advantages and disadvantages flowing from
incorporation.

Finance professionals should realise the benefits of a relevant business tax
course, because incorporation is no longer a sure route to large tax savings.

Bob Hawken is chief executive of professional
development at BPP Professional Education