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Formation of new firms hit by IR591
by Susie Hughes at 09:50 25/05/04 (News on IR591)
The Budget tax increase on small company profits has hit the formation of new UK companies by 18 per cent according to figures published by Companies House. Accountants Wilkins Kennedy says the figures prove that since the Budget fewer new businesses are forming as companies, and less sole traders and partnerships are deciding to convert into companies.
According to the figures 46,794 new companies registered with Companies House between March 21 and May 2 this year compared to 57,264 over the same period last year, a fall of 18 per cent.

Kevin Walmsley, Partner at Wilkins Kennedy, said: "The Budget tax rises have acted as a brake to the formation of new companies. With general business confidence at its highest level in four years the negative impact of the Budget on the small business sector appears to have been fairly significant."

On March 17, in a measure now known as IR591, the Chancellor announced that from April 1 small companies would pay corporation tax at a minimum of 19 per cent on profits distributed to non-company shareholders. All companies with profits of up to £50,000 and where the owners pay themselves partly in dividends have been hit by the rise. A company making £10,000 profit now pays £1,900 extra tax each year under the new rules if the profit is distributed as dividend.

According to Wilkins Kennedy, the types of businesses that are no longer incorporating are likely to represent the smaller end of the SME sector, mostly small family businesses or freelance contractors. The owners of these businesses are now missing out on the opportunity of reducing their financial liability risks, which is one of the principal benefits of becoming a limited company.

When a business incorporates the liability of its owners is limited to their original investment in the business. Owners of unincorporated businesses can lose all their personal assets in the event of bankruptcy or a lawsuit.

Kevin Walmsley said: "These businesses really canít afford to damage their profits by incorporating and paying more tax. By not incorporating though the owners of these businesses could be exposing themselves to greater personal risk.

"Operating as a sole trader or partnership is fine for a lot of businesses but it is important that the unlimited liability of the owners is partly compensated for by ensuring that the correct type of indemnity insurance cover is in place. This kind of insurance has been getting much more expensive."

Wilkins Kennedy admitted that that the full impact of the Budget tax rise on small companies is difficult to measure because Companies House only tracks incorporations.

The number of small companies that have disincorporated since the Budget is unknown.

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Susie Hughes © Shout99.com 2004

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Formation of new firms hit by ... Susie Hughes - 25/05
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