These are as follows:
(1) Class 1 NIC on dividends.
(2) Class 2 and 4 NIC on close company profit.
(3) Impute a commercial salary, i.e replace the actual salary taken with a salary more commensurate with the actual office holding.
(4) Abolition of the 10% tax credit for dividends from small close companies.
(5) Removal of the nil rate band for corporation tax.
The Inland Revenue’s preferred option is (4) but now Dawn Primarolo must come up with her own proposal and these will be put before the Chancellor , who must make a choice between the two. It may be that Dawn will choose one of the above options.
Option (3) would be unworkable in terms of completing a Self Assessment Tax Return. Who can decide what is a commercial going rate!
Option (4), which the Revenue is championing, presents a problem in that two regimes would operate for the taxation of dividends. The tax credit would remain for dividends received from large plc’s for instance, but would be removed for those dividends extracted from small close companies.
The simplest route to take would be option (5) but that would mean Gordon admitting he made a bit of a mistake when he originally introduced the nil rate band for Financial Year 2000. Let’s face it, we British don’t like to admit we are wrong!
As nobody knows what Gordon Brown is going to announce on 17th March 2004 and when such legislation will be introduced, we can only second guess him. Many commentators are anticipating that legislation will be enforceable from 6th April 2004 but this could also be from 17th March.
Those that are considering extracting dividends so as to avoid being caught by new legislation may need to consider doing this by 16th March 2004 therefore. In most cases these will be interim dividends and, this being the case, all entries should be made through the company books and the dividend physically paid by 16th March, in order to be effective.
The Inland Revenue’s view with regard to interim dividends is that they can only be regarded as due and payable when they are actually paid, and this is contained in their Company Taxation Manual 2007b. Although there is no legal precedent for this view it would be safer to adopt this policy rather than have to enter into a protracted argument with the Revenue at a later date with the prospect of losing such and having to pay the new tax on dividends anyway.
Whether and when to extract dividends must be an individual decision as, at the moment, we are all crystal ball gazing but I see the future becoming clearer in the next few weeks!
Qdos Consulting - for freelancers
Shout99 and specialist freelancer tax advisers Qdos Consulting are running a series of seminars immediately after the Budget to explain the impact of the Budget proposals on small businesses and freelancers.
Places are being taken up quickly. At the moment, you or your accountants/advisers can still reserve a place at any of the six venues: London, Leicester, Bristol, Kendal, Leeds, Aberdeen and Leicester. For more information, click on:
Seminars for Freelancers and Small Businesses: After the Budget