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It addresses some of the issues which have been raised by freelancers on Shout99, although the precise details will not be known until the publication of the Finance Bill, and even then, they could be subject to change or amendment during the Bill's passage through the Parliament.
The full briefing document from the Inland Revenue says:
Budget 2004 - Tax Treatment Of Small Companies
Following the 2003 Pre Budget Report announcement about reviewing the way in which companies and their directors /managers are taxed, the Government has announced in Budget 2004 that:
- Company profits paid out as distributions (usually dividends) to non-company shareholders will be subject to a minimum rate of corporation tax of 19%.
- The new minimum rate will apply to profits that are distributed to persons other than companies on or after 1 April 2004. The minimum rate will not apply to distributions made to other companies.
- There will be special rules to cover groups and to cover the situation where distributions in an accounting period exceed the profits of that accounting period
- The information in the question and answer brief below is based on the current proposed design of the measures announced in the Budget. The precise detail may be subject to change and cannot be treated as final until the Finance Bill has received Royal Assent.
1. Q Will the new rate affect my company?
A. This will affect companies who are liable to the starting rate of CT or those receiving marginal relief from the small companies rate if they make distributions of profits other than to companies.
2. Q We are a large company (or Group). Are we affected?
A. This affects those companies within the group who are liable to the starting rate of CT or those receiving marginal relief from the small companies rate if group companies make distributions of profits other than to companies.
3. Q Will this affect any other liability of the company or its directors (such as PAYE and NIC)?
A. No.
4. Q Does this replace the IR35 legislation?
A. No. Measures to tackle service companies were introduced in 2000 to ensure that employees could not avoid tax and NI contributions by using a company as an intermediary between them and their employer.
5. Q If this doesn’t replace the IR35 legislation is there a double charge?
A. No, there is neither a double charge on the individual nor on the company. Where the company has engagements that are within the intermediaries legislation and is treated as having made a 'deemed payment' under that legislation, that deemed payment and the employers NIC thereon is deductible against the company’s profits for CT purposes.
Under the existing legislation the individual is prevented from suffering a double charge. Where a company is treated as making a deemed payment and it makes a distribution in the same tax year or in a subsequent year, it can claim relief in order to avoid a double charge to tax on the individual. Relief is given by setting the amount of the deemed payment against the relevant distribution so as to reduce the distribution that is taxable on the individual.
6. Q How do I work out whether or not I have got to apply the new rate?
A. If your company pays corporation tax at an underlying rate of less than 19% and you make a distribution e.g. pay a dividend to someone other than a company then this new rate is likely to apply.
Example:
Assume that the basic profits for an accounting period are £40,000. The distributions made in the accounting period totalled £35,000 of which £5,000 were made to a company. The tax computation would be:
Basic Profits £40,000 @ 19% = £7,600.00
Less : Marginal Rate Relief (£50,000 - 40,000 x 19/400) = £ 475.00
Corporation Tax due on basic profits = £7,125.00
the underlying rate is 7125.00/40000 x 100 = 17.8125%
Total CT due: £10,000 @ 17.8125% = £1,781.25
£30,000 @ 19% = £5,700.00
£7,481.25
7. Q What is meant by ‘underlying rate’?
A. Underlying rate can be calculated as follows:
tax x 100
Profits
8. Q What help is available to work it out?
A. You may obtain help through our special ‘Distribution Rate Helpline’ by phoning 0845 3021418. For the hard of hearing, deaf, blind and speech impaired customers assistance is available from the Typetalk service. The number to dial for this service is 18001 0845 302 1418. There will also be full guidance on the calculation in the Company Tax Return Guide. And for those companies delivering their returns on-line the calculation will be done automatically.
9. Q If I get the tax due wrong will the company be charged interest or penalties?
A. The normal interest and penalty provisions will apply.
10. Q Where do we make a return of the extra tax?
A. On your Corporation Tax Self Assessment return.
11. Q When is the tax due to be paid?
A. On the normal due date for the payment of corporation tax for small companies, nine months and one day after the end of the accounting period.
12. Q When does the new rate start- which distributions - what profits?
A. Any distributions made to non-company shareholders on or after 1 April 2004.
13. Q What happens if the distributions in an accounting period are more than the profits?
A. Where distributions exceed profits for the accounting period, the excess is taken forward to the next or subsequent accounting periods to be 'franked' against future profits.
14. Q Is there any carry back of excess distributions or losses?
A. The excess will not be carried back and the normal rules apply to losses.
15. Q What happens if the company makes a profit but no distribution?
A. The normal rates of CT apply.
16. Q What happens if we pay distributions to other companies?
A. These distributions are disregarded for the purpose of working out whether the new rate applies. Where there is an excess of distributions over profits only that part of the excess related to distributions to companies is disregarded.
17. Q What do I do about dividends received from other companies when working out the corporation tax due?
A. There is no change to the way profits are calculated. This change only affects the rate at which profits are charged.
18. Q What happens if my company is part of a group of companies?
A. Each company in the group needs to consider if it has made a distribution to a non-company shareholder and what rate of tax applies to its profits for that accounting period.
Where there are insufficient profits in the company to cover distributions to non-company shareholders, then the excess will be passed to other companies within the group that can absorb the excess.
Where there are insufficient profits within the group to cover the distribution the remaining excess is carried forward to subsequent accounting periods.
19. Q My company has paid a distribution but made a loss. Is it correct that the company will not pay tax?
A. If you are part of a group, another company within the group may have the excess distributions allocated to it and that company will pay the appropriate rate of tax. Otherwise the excess will be carried forward the appropriate rate will apply when you have chargeable profits.
20. Q If companies wish to disincorporate so that the owner once again becomes self employed, what will the tax consequences be?
A. The normal rules relevant to the transfer of assets and the winding up of a company will apply.
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Shout99/Qdos Seminars
These and other issues relating to the new dividend tax, IR35, Section 660 and other matters of interest to small businesses and freelancers will be covered in the current Shout99/Qdos seminar tour.
For details of dates and locations, click here:
Start of round-the-country freelancers seminars
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Susie Hughes © Shout99.com 2004
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