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Small firms organised a petition to Government asking them to reconsider the controversial dividend tax, which was launched as a beneficial tax allowance in the Spring Budget.
The intention was that the previous dividend regime would be replaced with a tax free £5,000 dividend allowance. However, when detailed information was released it was clear that it will sit inside the tax bands - causing one professional body 'to dub it a tax rise by the back door'. (See: Petition calls for a rethink on dividend tax - Sept 15, Shout99).
The Government has now responded to this call, stating that while it remains committed to lowering the Corporation Tax rate for small firms, this does not come without a quid pro quo.
Its reponse says that if will not be possible to continue to cut corporation tax in isolation - 'without action elsewhere increases incentives for individuals to set up a company and pay themselves through dividends to reduce their tax bill (also known as tax motivated incorporation)'.
Tax motivated incorporation
The Treasury responded: "The Government is committed to supporting entrepreneurs and a fair tax system. Dividend tax reform allows further cuts in Corporation Tax and reduces the incentives for tax motivated incorporations.
"The Government is fully committed to supporting business and entrepreneurship. As set out at the Summer Budget 2015, the Government believes that one of the best ways to support growth and enterprise in the UK is through lower and more competitive Corporation Tax rates.
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"They will also pay less tax as a result of the increases to the tax-free Personal Allowance to £11,000 and to the Higher Rate Threshold to £43,000 in April 2016. We also have a commitment to go much further, taking the Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by the end of this Parliament.
"However, it is not possible to continue to reduce the Corporation Tax rate without looking at the overall balance of the tax system, including taxation of dividends. Lowering the Corporation Tax rate without action elsewhere increases incentives for individuals to set up a company and pay themselves through dividends to reduce their tax bill (also known as tax motivated incorporation). Therefore the Government is reforming dividend taxation.
"These reforms, which will also simplify the dividend tax system, will significantly reduce the incentives for people to set up a company and pay themselves through dividends rather than wages simply to reduce their tax bill. Taxpayers and the Exchequer will now be £500 million better off as result of reduced incentives for tax motivated incorporation. Those who choose to work through a company continue to pay lower rates of tax than the employed or self-employed. But the reforms move the overall tax rates for the self-employed and those incorporated closer together, making the system fairer overall."
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Susie Hughes © Shout99 2015
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