Finance Bill: 19% dividend tax and avoidance disclosure

The Finance Bill 2004 has been issued by the Government – all 574 pages of it! One has to wonder what level of scrutiny Parliament will give this mammoth bill? I have spent a thrilling few hours wading through those sections that seem most pertinent to freelancers.

In this analysis I am covering what appears to me to be the two most interesting aspects – the 19% dividend tax provisions and the new rules about disclosure of tax avoidance arrangements. I will review the rest at leisure and may report separately on any other issues of interest.

19% Dividend tax

The provisions relating to the new dividend tax - or to give it its proper description "The non-corporate distribution rate" - are set out in paragraph 28 of Chapter 1 of Part 3 of the Bill and in Schedule 3 to the Bill.

Small companies paying dividends on or after 1 April 2004 to non-corporate shareholders will face this additional tax if the company's underlying rate of corporation tax is less than the 'non-corporate distribution rate' as specified from time to time by regulation. This rate is currently set at 19%, being the rate of corporation tax applicable to companies whose taxable profits are between £50,000 and £300,000.

This new tax applies where a company makes "or is treated as making" one or more non-corporate distributions in any accounting period. As yet I have not identified in what circumstances a company might be "treated as making" such a distribution. However, the inclusion of this phrase appears to allow scope for the Government to apply the tax to situations that might not otherwise fall to be considered as a distribution.

Schedule 3 of the Finance Bill contains several pages of detailed provision relating to the way in which non corporate distributions ('NCDs') are matched to profits, the way in which they are carried forward when they exceed the available profits and the rules for transferring 'excess' NCDs to other companies including group companies. However these details add little to the information we have already seen in the 21 FAQs the Revenue published recently on this measure.

My initial reaction is that many of these provisions relate to situations that are likely to be rare for the average freelancer and their service company.

What is clear is that if the NCD exceeds the available basic profits in the year that the NCD is made – so that, in effect, the distribution is made out of accumulated profits – then there will not be any allowance for the fact that those accumulated profits may have suffered corporation tax at a rate of 19% or more. This appears to penalise those businesses that have been prudent in the past and have retained profits.

Tax Avoidance

In Part 7 of the Bill we find the detailed provisions relating to the new measures the Chancellor has introduced regarding the approval and disclosure of tax avoidance schemes. I suspect that it is this section of the Finance Bill that will generate the most debate in the coming weeks.

Scope

As feared it appears that the scope of this measure could be very wide indeed. For example the definition of a 'notifiable arrangement' is:

In this Part "notifiable arrangements" means any arrangements which—

(a) fall within any description prescribed by the Treasury by regulations,

(b) enable any person to obtain an advantage in relation to any tax that is so prescribed in relation to arrangements of that description, and

(c) are such that the main benefit, or one of the main benefits, that might be expected to arise from the arrangements is the obtaining of that advantage

"Advantage" is defined by the Bill as:

"advantage", in relation to any tax, means—

(a) relief or increased relief from, or repayment or increased repayment of, that tax, or the avoidance or reduction of a charge to that tax or an assessment to that tax or the avoidance of a possible assessment to that tax,

(b) the deferral of any payment of tax or the advancement of any repayment of tax, or

(c) the avoidance of any obligation to deduct or account for any tax; "

Given that most business structures and arrangements have, as part of their overall objective, the reduction or minimisation of tax then this legislation has the potential effect of bringing virtually all sensible tax planning within the scope of the legislation. Clearly much will depend on how the Revenue tries to interpret 'one of the main benefits'? It seems pretty clear however that many umbrella and composite company schemes for freelancers could be encompassed within this definition.

Notification

Responsibility for notifying any such arrangement to the Revenue will rest with the 'promoter' of the arrangement. However, if there is no promoter or if the promoter is outside the UK then the responsibility for notifying the Revenue rests with the tax payer. I'm struggling at the moment to envisage a situation where a UK taxpayer might make use of an arrangement that is caught by these rules but which does not have a promoter – whether in the UK or elsewhere!

The duty to notify requires notification within a certain time-frame, namely:

the earlier of the following—

(a) the date on which the promoter makes a notifiable proposal available for implementation by any other person, or

(b) the date on which the promoter first becomes aware of any transaction forming part of the proposed arrangements.

All notified arrangements will be given a reference number, which must be notified to any taxpayer who uses the arrangement and those taxpayers will have to notify the Revenue of the reference number of any arrangement that they are a party to.

The only exception to the requirement to notify such arrangements to the Revenue is where it is covered by legal privilege. Otherwise failure to make the necessary notification can result in a £5000 fine and a fine of £600 a day for every day after the initial fine is imposed if the failure persists.

Implementation date

These new rules will come into effect from 1 August 2004. However, they do not apply to arrangements that include any transaction entered into before 18 March 2004. Users of such arrangements, which have a non UK promoter or which do not have a promoter, do not have to notify such arrangements which include any transactions entered into before 23 April 2004.

Conclusions

These regulations could impact upon many of the schemes and arrangements that have traditionally been aimed at the freelancer market.

However the implementation provisions appear to exclude from the regulations existing schemes aimed at freelancers. While this might be of comfort to freelancers using such schemes I wonder if this exemption might breach anti competition regulations as the new rules could act as a great disincentive to introduce or use schemes that will be affected by these rules. This appears to hand a tremendous competitive advantage to those schemes that were in effect at 18 March 2004.

It is clear that professional bodies are already up in arms about the scope of these provisions and this issue will doubtless get a full airing as the Bill is debated. Whether the Government will agree any changes is another matter.

Kevin Miller, MA FCA