Possible change to taxation of small incorporated companies
The way in which small incorporated firms are taxed could be changed in the next Budget.
At the moment, many such smaller incorporated businesses take a part of their profits as dividends. The advantage in doing so is that dividend income does not attract national insurance charges and, for basic rate taxpayers, can also offer tax savings.
Believing that some businesses are exploiting the gap in treatments, the government signalled its plans to introduce new proposals on the taxation of smaller incorporated businesses in the pre-Budget Report.
“The government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals’ tax liability,” the Report said. “The government will therefore bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company.”
The Treasury has promised, however, that it would consider worries over the effect that any change might have on the ability of smaller companies to grow and develop.
A Treasury spokesperson suggested that companies that reinvested profits in their business would be rewarded.
The government is to conduct an open consultation on the proposals. “We want to make sure that the tax structure is used in the way it was intended,” said the spokesperson.