The Chancellor announced today the long awaited details of what has become known as IR591. The details are as follows:
As of 1st April 2004 any Company earning less than £10,000 pa and distributing that income as dividends will lose the 0% Corporation tax rate, and pay 19% instead.
So, what does this mean for contractors? Well, unless your Company earns less than £10,000 a year, almost nothing. The long awaited IR591 actually affects almost no contractors at all.
The full text from the Revenue PR is:
Tax Treatment of Small Incorporated Businesses
Who is likely to be affected?1. Companies or groups with profits chargeable to corporation tax below the threshold for the small companies’ rate who make distributions to non-company shareholders.
General description of the measure
2. The combined effect of measures introduced to support small business and the long standing differences between the tax treatment of earned income and dividend income have resulted in a number of businesses incorporating, solely or mainly, for tax reasons.
3. This measure puts matters on a more balanced footing by ensuring that when profits are distributed to non-company shareholders by a company or group, profits are charged at a minimum rate of corporation tax of 19%.
4. There will be rules to cover situations where distributions made exceed profits for the relevant accounting period.
5. [There will also be new requirements for companies to notify commencement of trading to the Inland Revenue, supported by appropriate sanctions.]
Operative date
6. The minimum rate will apply to distributions made on or after 1 April 2004. The requirement to notify to commencement of trading will take effect from [ Royal assent?].
Current law and proposed revisions
7. The rate at which corporation tax is payable depends on the amount of a company’s profits for the financial year in question. Corporation tax is charged at the Starting rate (currently 0%) where profits are £10,000 or less, the Small companies’ rate (currently 19%) where profits are £50,001 - £300,000, and the main rate (currently 30%) for profits exceeding £1,500,000. Marginal relief is given to smooth the transition from one rate to another where profits fall within these limits.
8. The measure will ensure that a minimum rate of corporation tax of 19% is charged when a company makes distributions to non-company shareholders. Lower rates of corporation tax will continue to apply where profits are retained or are distributed to other companies.
9. [Currently, companies are required to notify chargeability to corporation tax but not to tell the Revenue they have started trading. A new additional requirement to notify commencement of trading within three months of that commencement will be introduced. This will bring the rules applying to companies broadly in line with those applying to the self-employed. Failure to comply with the requirement will mean a potential liability to penalties in accordance with the rules for special returns in section 98 Taxes Management act 1970.]
Related budget stories:
IR35 and IR591 avoidance schemes to be hit in Budget
Mar 17, 2004
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