It could have been worse. As I sit down to write this blog, we’ve only got the main headlines rather than all the gory detail of the Chancellor’s tax plans; but there’s quite a bit of interest in those.
Capital Gains Tax
We’ll start with the biggest non news item of the lot. An official report commissioned two or three months back made recommendations for increasing capital gains tax rates so as broadly to align them with income tax rates. So instead of paying 28% tax on sales of residential property, and 20% on other assets, investors were looking down the barrel of a 40% or even 45% tax charge. As tax advisers we wish we had a fiver for every time we’ve been asked the question: “How can I forestall the increase by triggering disposals of my assets before Budget Day?” Apparently it’s been “leaked”, a few days before the budget, that CGT wasn’t going to go up: and we can certainly see nothing about this in the main budget announcements, in advance of the full detail which will transpire later. Perhaps someone has told Rishi Sunak that continuing uncertainty as to rates of capital gains tax is one of the biggest turn offs to enterprise that you can have. Would that previous Chancellors had learned this lesson!
Changing the Dynamics of Company Taxation
Probably the worst news, from our point of view as tax planners and, we would say, from the point of view of the economy of the UK as a whole, is the proposed increase in corporation tax to 25%. This “full” rate will apply on profits of over £250,000 in a year, where the business is run in a limited company. For companies with profits up to £50,000 though, the current rate of 19% will continue. Between £50,000 and £250,000 profits, a tapered rate will apply, whereby the rate goes up steadily from 19% to 25% the higher profits approach to the £250,000 ceiling.
We can only come to the conclusion that someone high up in Somerset House (HMRC’s headquarters) likes tapering rates of tax. For those of us who have to deal with them on the ground floor, though, they’re a nightmare. And the announcements (which take effect from 2023) have completely changed the dynamics of tax planning for owner managed businesses.
When you had a single flat rate of corporation tax, it was relatively straightforward to work out whether you should be paying director’s remuneration or dividends, in the common situation where the two were basically interchangeable methods of extracting profits from the company. Generally speaking dividends won hands down as the most tax efficient way of doing things, for the simple reason that there was no hefty 13.8% employer’s national insurance contribution attached, and no 12%/2% employee’s contribution. But now, the fact that remuneration is an allowable deduction against the company’s profits changes things markedly. Paying profits out in a form which can be deducted and reduce the profits chargeable to corporation tax will now, where those profits are within the taper band, reduce profits by a marginal rate which works out as being in excess of 25% - until you get the profits down to £50,000, when the rate at which you are getting relief for remuneration abruptly drops to 19% again.
Another effect of this change will be that other methods of extracting profits from a company, that don’t trigger national insurance, will become even more important: such as charging the company a rent for occupying any premises you own personally, or charging interest on director’s loans to the company. The one plus point is that it will be possible, providing you do your accounts within a reasonable time of the end of the company’s year, to have a look at the draft profits and see whether you should be providing a director’s bonus, or the other types of expenses mentioned, and how much such bonus will give rise to the best tax result. Woe to accountants sitting cowering over their calculators in their offices!
We also expressed the view that this change is bad news for the UK. It doesn’t seem to have occurred to Boris and his merry men (or if it has occurred to them they forgotten) that very low rates of corporation tax are good for the economy and, ultimately, for the government’s tax take. The lesson of Ireland and their 12 ½ % rate of tax, which resulted in an unprecedented boom in that country’s economy because of companies like Google and Microsoft basing themselves there, still doesn’t seem to have been learnt. One of the advantages of Brexit was the ability to compete aggressively for multinational tax “custom” in this way, without being shackled by EU pressure to equalise tax rates. Ah well …
The Good News
Any hospitality businesses that are left after 3 monster “lockdowns” will no doubt appreciate the extension of the 5% VAT rate until the end of September, followed by a 12.5% rate for the 6 months after that, until 31 March 2022. Pubs, restaurants etc are not going to be putting their prices down, certainly, and the result of this VAT cut is therefore directly to increase the businesses’ profits: and good luck to them, we say.
We also think it qualifies on the whole as good news that income tax, national insurance, and VAT are not going up. It’s true that income tax rates and thresholds are going to be frozen from next year until 2026; and this has been justifiably referred to as a “stealth tax increase”. But we have to say that, if we’ve been Chancellor, we’d at looked hard at increasing the rates of these three taxes, which are the biggest sources of income for the government.
Also no whisper, as far as we can see, of the much dreaded “wealth tax”.
An Unexpected Boost
This is a blog about tax planning, and therefore I’m not going to go on and on about economic prospects, sources of help for those struck by the government’s hatchet job on the economy over the last 12 months, and so on. And from the tax planning point of view, there is an unexpected boost in the form of a 130% rate of relief for purchases of equipment by business. So if you buy a new van for say £10,000, you will get £13,000 tax relief for the purchase. (Note that this doesn’t mean that your tax bill comes down by £13,000, but merely that your profits on which are reduced by this amount.) In a way this is rather akin to the enhanced rate of relief for research and development, where you’re treated as if you’d incurred more expense than you actually have.
Watch this Space
So much for our very first impressions. Follow us over the next few weeks, as we watch this story unfold.
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