There have not been many new announcements for SMEs. There is no change in capital gains tax or inheritance tax (for now). Dividend tax increases have widened the income/capital gap, and shareholders will want to make hay while the sun shines. Property developers are hammered once again and there are a few international aspects with more restrictions on pension draw-down.
Covid 19 has introduced significant financial uncertainty. Most people accept that taxes have to rise but the ways that this will happen has led to much more speculation than usual. Before this Budget, the chancellor had already given us two taxation hammer blows – corporation tax to increase (from 19% to 25% from 1 April 2023) and the recently announced dividend and national insurance increases (1.25% increase to dividend tax rates and employer and employee national insurance from 6 April 2022) – but everyone was still alert for some bad news in the 27 October Halloween (just about!) Budget. All was quiet on the taxation front for SMEs, and it is unclear whether this is the calm after the storm or the calm before another storm. All we can do is take a breather and reflect on the position as it is now.
Increase in top rate capital gains tax from 20% to 45%
This of course did not happen! Although I was delighted that for now capital gains tax will stay as it is (top rate 20% with 10% rate in respect of £1m of gains which qualify for business asset disposal relief (BADR)) I found it slightly unnerving that the chancellor made no positive references to keeping CGT at the same rate. Also, there was no mention of inheritance tax (IHT) which had been the subject of rumours of reduction or even abolition. Could it be that some plan is afoot to ‘abolish’ IHT and restructure capital gains tax? This would be extreme, but I am reminded that the Office of Tax Simplification (OTS) has suggested removing CGT rebasing on death along with a possible decrease to the IHT rate.
Increased dividend rates
When referring to the increase in dividend rates by 1.25% (from 6 April 2022) HMRC say that ‘this will also help to limit the incentive for individuals to set up a company and remunerate themselves via dividends rather than as wages, to reduce their tax bill’. This is rather disingenuous as they already did this in 2016/2017 when dividend rates increased by 7.5%. Interestingly, these rate rises may actually act as an incentive to incorporate existing businesses. If a business owner is happy to trigger a capital gains tax liability by selling his business to a company (various advantages and disadvantages associated with this) then (by my calculations) he can charge interest on the resulting loan balance and extract profits in this way at a 3.5% lower effective tax rate than he pays on the business profits. There may therefore actually be more incorporations!
The great capital gains tax/income tax divide
With increased income tax rates and static capital gains tax rates (for now!), shareholders are still heavily incentivised to realise company value as capital. There are still no tax rules aimed at combatting ‘money-boxing’ and so anyone with a potential sale on the cards should avoid taking dividends at higher or additional rates in the run-up to a sale. Also, there may ultimately be advantages to concluding deals by the end of the tax year.
For those not involved in a sale the opportunities for capital extraction may be limited. Since the 2016 ‘anti-phoenixing rules’ a liquidation only generally works if there is little involvement by shareholders in the business for two years after the hoped-for capital distribution. Transactions in securities legislation (TISL) aims to counter other instances of a shareholder extracting value as capital without a substantial change of ownership. For example, a disposal of shares to a connected company with dividends from those shares to the connected company being used to fund the purchase is likely to fall within the realm of TISL. However, TISL is a strange area of legislation, not being subject to (or indeed capable of) self-assessment. I wonder whether the widening gap will tempt some shareholders to purposely undertake transactions within TISL in the hope that HMRC do not raise a counteraction notice within six years (the onus with TISL rests squarely on HMRC’s shoulders – as opposed to the anti-phoenixing TAAR which is self-assessable). The rights and wrongs of this kind of approach is a philosophical question and would merit an article in its own right.
Other measures
4% surcharge on property development companies: Slamming any kind of profiteering from residential property continues to be in vogue and it is no surprise to see a 4% increase in corporation tax for property development companies. This will only apply to profits over £25m – which will be an allowance that can be allocated to group companies. Associated finance costs will also be restricted (for some reason) and this gives large development groups the prospect of a charge on a figure in excess of commercial profits (and I assume that this will work along the same lines as the finance restriction for individual residential landlords).
International aspects: Unsurprisingly, there have been various measures to remove favourable tax treatment for EU member states (now that we have left the EU). One such measure involves tightening up on how EU member states can relieve EU branch losses (now they can only do this if there is no possible way of getting relief overseas, whereas before it was optional). There are similar measures which put EU countries on a similar footing to other overseas companies.
Interestingly, there is a consultation on introducing a mechanism whereby offshore companies can redomicile to the UK. Currently ‘moving’ offshore structures to the UK can involve unnecessarily complicated asset transfers. It would be nice if we could just ‘turn a switch’ which is what a redomicilation mechanism hopes to achieve.
Pensions: I also noticed that the earliest that pension benefits can now be taken is 57 rather than 55 (for those born in 1973 or later). I wonder what the age will be by the time I reach the age of 57…
There have not been many new announcements for SMEs. There is no change in capital gains tax or inheritance tax (for now). Dividend tax increases have widened the income/capital gap, and shareholders will want to make hay while the sun shines. Property developers are hammered once again and there are a few international aspects with more restrictions on pension draw-down.
Covid 19 has introduced significant financial uncertainty. Most people accept that taxes have to rise but the ways that this will happen has led to much more speculation than usual. Before this Budget, the chancellor had already given us two taxation hammer blows – corporation tax to increase (from 19% to 25% from 1 April 2023) and the recently announced dividend and national insurance increases (1.25% increase to dividend tax rates and employer and employee national insurance from 6 April 2022) – but everyone was still alert for some bad news in the 27 October Halloween (just about!) Budget. All was quiet on the taxation front for SMEs, and it is unclear whether this is the calm after the storm or the calm before another storm. All we can do is take a breather and reflect on the position as it is now.
Increase in top rate capital gains tax from 20% to 45%
This of course did not happen! Although I was delighted that for now capital gains tax will stay as it is (top rate 20% with 10% rate in respect of £1m of gains which qualify for business asset disposal relief (BADR)) I found it slightly unnerving that the chancellor made no positive references to keeping CGT at the same rate. Also, there was no mention of inheritance tax (IHT) which had been the subject of rumours of reduction or even abolition. Could it be that some plan is afoot to ‘abolish’ IHT and restructure capital gains tax? This would be extreme, but I am reminded that the Office of Tax Simplification (OTS) has suggested removing CGT rebasing on death along with a possible decrease to the IHT rate.
Increased dividend rates
When referring to the increase in dividend rates by 1.25% (from 6 April 2022) HMRC say that ‘this will also help to limit the incentive for individuals to set up a company and remunerate themselves via dividends rather than as wages, to reduce their tax bill’. This is rather disingenuous as they already did this in 2016/2017 when dividend rates increased by 7.5%. Interestingly, these rate rises may actually act as an incentive to incorporate existing businesses. If a business owner is happy to trigger a capital gains tax liability by selling his business to a company (various advantages and disadvantages associated with this) then (by my calculations) he can charge interest on the resulting loan balance and extract profits in this way at a 3.5% lower effective tax rate than he pays on the business profits. There may therefore actually be more incorporations!
The great capital gains tax/income tax divide
With increased income tax rates and static capital gains tax rates (for now!), shareholders are still heavily incentivised to realise company value as capital. There are still no tax rules aimed at combatting ‘money-boxing’ and so anyone with a potential sale on the cards should avoid taking dividends at higher or additional rates in the run-up to a sale. Also, there may ultimately be advantages to concluding deals by the end of the tax year.
For those not involved in a sale the opportunities for capital extraction may be limited. Since the 2016 ‘anti-phoenixing rules’ a liquidation only generally works if there is little involvement by shareholders in the business for two years after the hoped-for capital distribution. Transactions in securities legislation (TISL) aims to counter other instances of a shareholder extracting value as capital without a substantial change of ownership. For example, a disposal of shares to a connected company with dividends from those shares to the connected company being used to fund the purchase is likely to fall within the realm of TISL. However, TISL is a strange area of legislation, not being subject to (or indeed capable of) self-assessment. I wonder whether the widening gap will tempt some shareholders to purposely undertake transactions within TISL in the hope that HMRC do not raise a counteraction notice within six years (the onus with TISL rests squarely on HMRC’s shoulders – as opposed to the anti-phoenixing TAAR which is self-assessable). The rights and wrongs of this kind of approach is a philosophical question and would merit an article in its own right.
Other measures
4% surcharge on property development companies: Slamming any kind of profiteering from residential property continues to be in vogue and it is no surprise to see a 4% increase in corporation tax for property development companies. This will only apply to profits over £25m – which will be an allowance that can be allocated to group companies. Associated finance costs will also be restricted (for some reason) and this gives large development groups the prospect of a charge on a figure in excess of commercial profits (and I assume that this will work along the same lines as the finance restriction for individual residential landlords).
International aspects: Unsurprisingly, there have been various measures to remove favourable tax treatment for EU member states (now that we have left the EU). One such measure involves tightening up on how EU member states can relieve EU branch losses (now they can only do this if there is no possible way of getting relief overseas, whereas before it was optional). There are similar measures which put EU countries on a similar footing to other overseas companies.
Interestingly, there is a consultation on introducing a mechanism whereby offshore companies can redomicile to the UK. Currently ‘moving’ offshore structures to the UK can involve unnecessarily complicated asset transfers. It would be nice if we could just ‘turn a switch’ which is what a redomicilation mechanism hopes to achieve.
Pensions: I also noticed that the earliest that pension benefits can now be taken is 57 rather than 55 (for those born in 1973 or later). I wonder what the age will be by the time I reach the age of 57…
There have not been many new announcements for SMEs. There is no change in capital gains tax or inheritance tax (for now). Dividend tax increases have widened the income/capital gap, and shareholders will want to make hay while the sun shines. Property developers are hammered once again and there are a few international aspects with more restrictions on pension draw-down.
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