Summer Budget: business managers
Taxing changes for business managers
The Budget produced more than a few surprises that will have businesses and entrepreneurs frantically checking how they are likely to be impacted.
Private business owners regularly extract cash from their companies via dividends and following the Budget they will face an increased tax bill in future because of increases in the rate of income tax on dividends from April 2016.
The current system entitles all taxpayers to a notional 10% tax credit, which the Chancellor not unfairly described as “complex and archaic”. This effectively led to tax rates lower than the headline statutory rates and headaches for advisors trying to explain what a notional dividend credit meant.
On scrapping the notional credit, George Osborne announced its replacement: a new tax free allowance of £5,000 for all taxpayers. The rates of income tax on dividends will now be set at 7.5%, 32.5% and 38.1% for basic rate, higher rate and additional rate taxpayers respectively. This is an increase of 7.5% across the board, as currently the effective tax rates on dividends are 0%, 25% and 30.6% respectively. I suspect that many private businesses will be reviewing their cash extraction strategies in light of these changes.
A measure that few predicted was the further reduction in corporation tax from 20% to 19% in 2017 and 18% in 2020. This is perhaps a surprise given the 20% rate is already the lowest in the G20, but as the Chancellor proudly stated, it is further evidence that the UK is “open for business”. Previous reductions in corporation tax have been countered slightly by a reduction in capital allowance rates; however, the Annual Investment Allowance (which gives 100% relief for qualifying capital spend) was set at £200,000 permanently from 1 January 2016, reversing the planned reduction to £25k.
These changes will be welcomed by companies of all sizes, but for large companies and groups with taxable profits of more than £20m, there will be a negative impact on cash flow as the corporation tax quarterly instalment dates will be brought forward by four months for accounting periods starting on or after 1 April 2017.
Currently, the first quarterly instalment of corporation tax is due in month seven of a company’s accounting period and from 2017 the first payment will be due in month three. Cash flow planning will be required for companies impacted by this change as it is likely that the first instalment under the new rules will be due one month before the final quarterly instalment under the old rules.
On the back of the recent Budget in March, there is some tightening to the Enterprise Investment Scheme and Venture Capital Trust rules. Companies will no longer be able to use EIS or VCT money to acquire a business and companies that are over seven years old will now generally be excluded from raising their first EIS or VCT investments. This is increased to 10 years for “knowledge-intensive” companies.
A “big bet” of many Budget tipsters was some tinkering with capital gains tax and in particular, potential major changes to Entrepreneurs’ Relief, which gives a 10% capital gains tax rate on qualifying business disposals up to a lifetime limit of £10m.
Any individuals looking to sell their business will be breathing sighs of relief as these predicted changes did not appear. Albeit, certain investment fund managers who may have been banking on paying 10% tax on their “carried interest” will be immediately affected, as rules come into force from today taxing this carried interest at the full capital gains tax rate of 28%.
Susannah Simpson is a private business partner at PwC in Scotland