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However, there were further measures in the Budget book which affect small businesses. Here, accountants, Kingston Smith offer their analysis and opinion on this Budget.
Corporation Tax to reduce to 17 per cent in 2020
Last year’s second Finance Act provided for the reduction of the headline rate of corporation tax from 20 per cent to 19 per cent for the financial years 2017, 2018 and 2019, and a further reduction to 18 per cent from 2020. The change will reduce the rate further from 2020 to 17 per cent.
Kingston Smith comment: The measure will benefit all companies within the charge to corporation tax and the hope is clearly that it will act as an inducement to multi-nationals to invest and shift profits to the UK. Quite how this fits with our commitment to the BEPS (Base Erosion and Profit Shifting) project is an interesting question, but it is estimated that the cuts announced since 2010 could increase GDP by between 0.6 per cent and 1.1 per cent.
The reduction will also increase the incentive on the part of small businesses to incorporate.
Loans to shareholders
Where a close company makes a loan to a participator (usually just shareholders), the company is required to pay corporation tax at the rate of 25 per cent on the amount of the loan. The purpose of this is very simply to make the payment of loans a less attractive alternative to paying salaries or dividends. The rules permit this tax to be refunded as and when the loan is repaid.
With the rate of income tax on dividends being increased by 7.5 per cent across the board from April 6 it was inevitable that someone at the Treasury will have spotted that this tax provision on loans should be adjusted accordingly. Therefore, for loans advanced on or after April 6 2016 the rate of tax on loans increases to 32.5 per cent.
KS comment: Whilst this change was expected, it is interesting that it does not come into effect immediately. Loans made before 6 April 2016 are taxed under the old rate. There is still a chance therefore for some planning with loans and dividends before the relevant tax rates change in April.
Entrepreneurs’ relief
A number of changes to Entrepreneurs’ Relief have been announced in the Budget.
Changes were made in the March 2015 Budget to deny or restrict Entrepreneurs’ Relief in the case of joint venture companies and companies that are partners in partnerships or LLPs. These changes were deemed to be harsh and caught out commercial structures.
The change announced in the Budget rolls back last year’s changes but only where the person making the disposal has an effective interest of five per cent or more in the underlying trading entity.
KS comment: We believe that this is a useful relaxation as last year’s changes were particularly harsh. Structures of this type need to be reviewed to ensure that, where possible, the revised ‘5 per cnet tests’ are met.
Entrepreneurs’ Relief is available where an individual owns an asset which is used for the trade of a partnership/LLP in which he has an interest or his personal company. The disposal of this asset had to occur along with a disposal of the owner’s interest in the business concerned. Changes were made in 2015 to only allow this relief where the individual also had a five per cent reduction in their interest in the business that used the asset. It has now been decided that this would deny relief for associated disposals where the business and asset are passing within the family as part of normal family succession arrangements and the disposal of the interest in the business is less than five per cent. This is being removed from 18 March 2015 to allow purchases by persons connected with the vendor.
In addition the five per cent test is being relaxed where a person disposes of his entire interest in the underlying business and has previously held a larger stake.
KS comment: These may seem like minor technical changes but are welcomed as the 2015 changes were poorly targeted and applied in commercial or family situations on an unfair basis.
Extension capital gains tax entrepreneurs’ relief to long-term investors
Long-term investors in unlisted trading companies, who don’t own five per cent of the shares or are not officers or employees of the company concerned, do not qualify for Entrepreneurs’ Relief. The good news is that the relief is now to be extended so such long term investors so as to give them a 10 per cent rate of CGT up to a lifetime limit of £10 million. However, there are conditions:
KS comment: This is a generous new relief and will help companies attract equity capital particularly in situations where SEIS, EIS or VCT investments are not permitted either because the company is too large or that does not conduct a qualifying trade. It puts Entrepreneurs’ Relief for companies on a par with partnerships and LLPs where passive investing partners could already claim that relief.
Entrepreneurs’ relief and goodwill
Budget 2015 prevented Entrepreneurs’ Relief from being available on goodwill where a business is transferred by a sole trader, partnership or LLP to a limited company. This curtailed a popular and tax effective way of incorporating a business.
This change is now being reversed in the limited circumstances. The change is being backdated to the date the original change was effective from, that being 3 December 2014.
KS comment: There were a number of changes to Entrepreneurs’ Relief announced in the Spring 2015 Budget to curtail perceived abuses and some of the have been rolled back in this year’s Budget. Again a welcome change but one that will only apply in a number of limited circumstances. It will not apply for instance where a partnership of five equal partners transfer their business to a company which they own equally as they will each own five per cent or more of the shares and the company will not be controlled by a new, independent owner.
Budget information
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Susie Hughes © Shout99 2016
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