Planning ahead has never been more essential, with legal changes and new developments affecting how much tax you pay The chancellor has been busy in his last few Budgets in reshaping taxation and, following his pre-Budget report at the end of 2003, he had much to say about 'level playing fields' between the Inland Revenue and taxpayer. But through changes he has made, the field is far from level between different business structures, and a number of different matters must be weighed up to arrive at the correct choice.
Company tax has been very much reduced, whereby profits up to ú10,000 are free of corporation tax, up to ú300,000 at 19 per cent and over that at 30 per cent.This compares with the tax leviable on a partnership or LLP at a personal rate of 10 per cent for income up to ú1,960, at 22 per cent up to ú28,540 and 40 per cent thereafter - after a personal allowance of ú4,615. A company is therefore a much better vehicle for sheltering undrawn profits.
But one must contrast that with the new, and very expensive, regime of taxing company cars and increased National Insurance contributions (NIC) payable on salaries paid from companies against profit shares from non-incorporated businesses.
A very popular planning step much used in recent years to reduce tax costs has been the payment of director/shareholders through the medium of dividends instead of salary. Dividends are only taxed at an effective top rate of 25 per cent of the net dividend and both employers' and employees' NIC are not payable. Considerable savings can therefore be made. However, in his pre-Budget statement, the chancellor made more than a veiled threat to introduce legislation in the forthcoming Finance Act to prevent this, another of his so-called 'levelling' measures. He has not said how he intends to do this and there is much speculation that he may levy NIC on dividends.
My own view is that we may see an extension of the horrendous 'IR 35' rules, by deeming income as something different from what it is and taxing it at a higher rate accordingly. The only safe planning now, if you find yourself in this situation, is to take maximum dividend income before 5 April by writing the dividends to directors' loan accounts for subsequent withdrawal of them, income tax and NIC free. There are, however, restrictions imposed by the Companies Acts that limit the amount that can be paid (and remember dividends have to be paid to all shareholders, not merely director/shareholders, unless properly waived in advance).
Sale and acquisition
Many are not aware that, for capital gains tax (CGT), both retirement relief and indexation allowance have been abolished for individuals and replaced with taper relief. The rules for this new relief are complex, having been changed four times since their introduction in 1998. The relief is given at different rates for business assets and non-business assets. For the former, after two years of ownership, one's CGT is reduced to a quarter of the normal rate, effectively producing a top tax rate of 10 per cent, while for the latter a full 10 years' ownership is needed before full relief is given, but the effective top rate is still 24 per cent. One would have hoped that the distinction between the two would have been easy to establish - sadly not.
The position is highly complex, particularly if the frequent legislative changes have recategorised the asset, as full relief may not be available. For example, premises owned by some of the partners, but occupied by the partnership, are still treated as nonbusiness, though the law is being changed as from 6 April 2004 - but not retrospectively, so a substantial tax bill can still be incurred even after then as the full relief is not available until 2014. Careful planning can reduce the impact of such anomalies.
The purchase of goodwill on the acquisition of a business has always presented a problem to the purchaser as the cost has not been allowable against tax until that goodwill is realised by a future sale, which is rare.
There is now some measure of relief since, if the purchaser is a company, the cost can be written off against corporation tax, but not if the buyer is unincorporated.
Stamp duty land tax
Stamp duty is one of the oldest taxes on the statute book. The Finance Act 2003 saw this swept away for all property transactions, though leaving it intact for shares and certain transactions involving partnerships.
Instead we now have stamp duty land tax (SDLT). This borrows many concepts from the stamp duty, but reinforces them with newer ones, particularly in the compliance area, taken from the self-assessment regime for income tax, while rebasing the tax on transactions instead of documents. For those involved in any transactions involving any interest in land, advice on the effects of SDLT is essential.
While rates on purchases have remained the same, with the starting point for commercial property raised from ú60,000 to ú150,000, a new levy is introduced for leases, the effect of which is broadly to increase substantially the amount of tax payable.
A complex return form now has to be completed and submitted by the purchaser whenever there is a land transaction, the onus being on the purchaser to get it right.As the basis of liability rests on a transaction, not a deed, judgment is often required to determine, against a complex new legislative background, whether that point has arrived or not. A mistake resulting in a failure to deliver the return will have expensive consequences. It is no longer possible to delay or avoid liability by not signing or completing a deed.
This only just gives a flavour of some of the recent changes. It has not become any easier for the businessperson, either in planning their own affairs or advising their clients against an ever-more complex tax regime. Professional advice is always useful if one is to avoid new and unforeseen pitfalls and organise one's affairs to mitigate and reduce tax by legitimate devices.
Alan Neal is a solicitor and tax partner at Morton Fisher solicitors