Thousands of limited company owners face an extra tax bill of £1,900 thanks to freshly laid plans spelt out in Gordon Brown’s Pre-Budget Report.
The Chancellor claims introducing 19 per cent tax on profits enjoyed by all small traders will replace the zero per cent and non-corporate distribution rates, to usher in simpler calculations.
One-man band companies heard yesterday complying with the single rate means less red tape and represents ‘the lowest corporation tax rate since 1973,’ yet their advisors have told Freelance UK they strongly disagree.
“Existing limited company owners will pay more tax thanks to the new 19 per cent tax on small companies,” said Simon Dolan, senior and founding partner at SJD Accountancy.
“The Chancellor’s PBR effectively signals his decision to go against the non-corporate distribution and zero per cent starting rate, both of which he introduced.
“Ironically, Brown is trumpeting the new band as a removal of red tape for business – despite the fact that he introduced the red tape in the first place,” Mr Dolan told Freelance UK, referring to the complex ‘dividend tax’ of 2002.
“Secondly,” he added, “Brown is celebrating the lowest rate of incorporation tax since 1973 – even though last year it was significantly less, namely at the zero per cent starting rate.
“Brown first introduced [this] to promote entrepreneurial activity…then of course the Treasury realised they were losing on the tax take, so he introduced the 19 per cent rate. Now the government says it realises this was too complicated, and as a result, cheap and easy political points are being scored by scrapping it.”
The Chancellor won his political points from the Professional Contractors Group (PCG) and the Federation of Small Businesses, which have both welcomed the PBR for simplifying corporation tax.
Yet enterprise advisors at Egos Ltd point out the long-awaited simplification of corporation tax comes at a hefty price for the smallest of companies.
Roger Sinclair, the firm’s legal and contract specialist, lambasted the Chancellor’s “patronising” attempt to dress up the 19 per cent tax take as positive for small company owners.
“The Chancellor says he intends to replace the non-corporate distribution rate and zero percent rates of corporation tax with a new single banding set at the current small companies’ rate of 19 per cent.
“He then suggests that this should be regarded as a good thing because it ‘will simplify the corporation tax calculations for most small businesses’, and leave ‘the small companies rate at its lowest since its introduction in 1973’. As an advisor to freelance businesses, I’m weary of this patronising doublespeak,” Mr Sinclair said.
“For him to say anything other than he is raising taxes for all companies with profits between £10,000 and £300,000 by £1,900, and on all companies with profits between £0 & £10,000 (though by a lesser amount), is an insult to the intelligence of those whom he is in office to serve.”
Scrapping the zero starting band and the non-corporate distribution rate for small businesses, including freelancers and contractors, is indeed a policy U-turn, according to the Chartered Institute of Taxation(CIOT).
Andrew Hubbard, chairman of the Institute’s Small Business Working group, said, “This is a U-turn: In the view of the CIOT the non-corporate distribution rate was very misguided. It was over complex and failed to address the structural issues in the tax system for small companies.”
More mature lucrative traders would be less affected by the 19 per cent levy, as opposed to small traders whose annual turnover is around £30,000 and whose profits will not be distributed, Mr Hubbard explained.
The Institute said enterprise tax reform remained high on its agenda, but explained change was unlikely until the Court of Appeal concludes the fate of Geoff and Diana Jones.
“Small business tax still needs to be sorted out properly,” said Mr Hubaard, who is also a director of Tenon, the business specialist.
“Until we have the decision in Arctic Systems nothing much will happen. So the abolition of the non-corporate distribution rate is welcome, but it should not be regarded as anything more than a stopgap.”
Elsewhere in the PBR, the Institute welcomed the Chancellor’s move to press the European Commission to increase the turnover threshold of the Cash Accounting Scheme from £665,000 to £1,350,000.
Such measures will benefit both limited companies and sole traders, with up to one million manager-owners able to benefit from a range of flexible payment practices to suit their business needs.
Andrew Hubbard said: “This is clearly good news. The main benefit will be on cash accounting, rather than annual accounting – if the increase in threshold is permitted by Europe.
“Cash accounting is good news from small businesses – entrepreneurs don’t have to pay their VAT until they have been paid by the client.”
Simon Juden, chairman of the PCG, endorsed the plans to extend flexible VAT payment options to more small firms, but said the PBR could have done more to support the self-employed and the contributions they make.
In particular, he highlighted the plight of freelance and contract professionals in the IT sector, operating under the fear of IR35 and having to fund their own training from post-tax revenue.
“We are disappointed…that he [the Chancellor] continues to ignore the one in seven workers in the UK who choose to work for themselves,” Mr Juden said.
“The UK’s freelance consultants and contractors offer the economy a highly skilled and flexible resource and have an important role to play in fulfilling Mr Brown’s vision of equipping Britain for the global economy.”
However buried in the PBR’s small print, is the pledge to freeze national insurance for the UK’s self-employed, on Class 4 and Class 2 rate National Insurance contributions.
HRMC also pledged it would continue to use IT to gain department efficiencies, retain its risk-based approach to regulation and introduce post-implementation reviews for new regulations.
The Chartered Institute of Taxation cautiously welcomed the news: “It is good that HM Revenue & Customs look at the cost effect on business of complying with tax regulations and is also looking to enhance the IT infrastructure, but is it hard to see how this will translate into immediate gain for the smaller business.”
Dec 6, 2005
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