PBR (7): Gordon will fix it for you
The corporation tax system for small businesses has undergone several changes in recent years. First an incentive was introduced which became a loophole which needed to be closed. Andy Vessey from Qdos Consulting looks at whether the Chancellor has finally 'fixed it'.
Andy Vessey writes:
Now then, now then, Chancellor Brown has received several letters saying "Dear Gordon, can you please fix the corporation tax system for me". Goodness gracious, goodness gracious, but as it happens, yes he can.
In the Pre-Budget Report 2005, the Government provided details of their proposal for simplifying the corporation tax regime for small companies.
In 2002 a nil rate of corporation tax for profits up to £10,000 per year was introduced. This was intended to act as an incentive for companies wishing to grow.
Instead, it provided a motivation for many small businesses to incorporate simply to save tax – a heinous crime!
To counter this perceived abuse, the non-corporate distribution rate (NCDR) was introduced in the 2004 Budget. This applies a 19 per cent rate of tax to distributions to non-corporate shareholders by companies whose underlying rate of corporation tax is less than 19 per cent. This has merely served to add more complexity to an already less than straightforward tax system.
The Government considered three options, with changes to be effective from April 2006:
- 1. Do nothing.
2. Remove the NCDR and leave the nil rate of corporation tax in place.
3. Remove both the NCDR and nil rate of corporation tax, leaving a standard small companies rate.
It decided on option 3 but with the added bonus of increasing first year capital allowances for small businesses from the current level of 40 per cent to 50 per cent for investment in plant and machinery in the year from April 2006. The rationale behind this decision is that it best meets the Government's objectives to better focus tax incentives for re-investment and to reduce the administrative burdens on business by simplifying the corporation tax system.
Any attempt to simplify the UK's tax system has to be applauded so long as it is fair and promotes business growth. These proposals should therefore ensure that running a company is still a tax effective vehicle for those with aspirations. Perhaps we can half raise a glass to Gordon at midnight come the end of the year?
Andy Vessey
Qdos Consulting