IN THE government’s first Budget, headline pledges, such as introducing an effective £1 million inheritance tax threshold for family homes, were mixed with a few surprises that will have businesses and entrepreneurs frantically checking how they are affected.
Income tax on dividends to increase
MANY private business owners regularly extract cash from their companies via dividends and will face an increased tax bill in future due to increases in the rate of income tax on dividends from April 2016 onwards.
These will now be set at 7.5%, 32.5% and 38.1% for basic rate, higher rate and additional rate taxpayers respectively.
With the effective tax rates on dividends currently set at 0%, 25% and 30.6% respectively, this is an increase of 7.5% across the board.
The £5,000 exemption will be popular in simplifying the regime for many but for many entrepreneurs the increased rate to 38.1% will be quite a shock.
I suspect that many private businesses will be reviewing their cash extraction strategies in light of these changes.
Surprise reduction in corporation tax
A measure that few predicted was the further reduction in corporation tax from 20% to 19% in 2017 and 18% in 2020. This is perhaps a surprise given the 20% rate is already the lowest in the G20 but, as the Chancellor proudly stated, it is further evidence that the UK is “open for business”.
Previous reductions in corporation tax have been countered slightly by a reduction in capital allowance rates; however, the Annual Investment Allowance (which gives 100% relief for qualifying capital spend) was set at £200,000 permanently from January 1 2016, reversing the planned reduction to £25,000.
These changes will be welcomed by companies of all sizes but for large companies and groups with taxable profits over £20 million there will be a negative impact on cash flow as the corporation tax quarterly instalment dates will be brought forward by four months for accounting periods starting on or after April 1 2017.
Currently the first quarterly instalment of corporation tax is due in month seven of a company’s accounting period and from 2017 the first payment will be due in month three. Cash flow planning will be required for companies impacted by this change as it is likely that the first installment under the new rules will actually be due one month before the final quarterly instalment under the old rules.
Vivion Cox, founder and chief executive of internet and social media marketing company Klood, based in Milton Keynes, said: “As a private business, we welcome the surprise drop in corporation tax and are also pleased that the beneficial R&D regime that is currently in place will continue. This is particularly good news for the technology sector.”
Entrepreneurs owning acquisitive corporate groups may find their group’s future corporation tax profile impacted by the withdrawal of relief for the cost of “goodwill” in respect of all acquisitions and disposals made on or after July 8 2015. Transactions already in progress may be impacted by purchasers renegotiating terms following perceived value erosion in the business being acquired.
Looking ahead, both sellers and purchasers may benefit from reconsidering their corporate structures and intellectual property holding strategies in order to facilitate future deals.
Capital gains tax stays put
A “big bet” of many Budget tipsters was some tinkering with capital gains tax and in particular, potential major changes to Entrepreneurs’ Relief, which gives a 10% capital gains tax rate on qualifying business disposals up to a lifetime limit of £10 million. Any individuals looking to sell their business will be breathing sighs of relief as these predicted changes did not appear.
However, certain investment fund managers who may have been banking on paying 10% tax on their “carried interest” will be immediately affected, as rules come into force taxing this carried interest at the full capital gains tax rate of 28%.