As my colleague, Dan Robertson, explains in more detail in a separate article, the UK’s historically low corporation tax rate of 20 per cent is set to reduce further to 17 per cent, giving the UK the lowest headline rate in the G20 by some margin.
As Dan also explains, this rate reduction is offset by restrictions to loss relief and interest relief, as well as other changes designed to protect and broaden the tax base. But these changes generally do not apply to SMEs. So does the Business tax roadmap point the way to tax nirvana for SMEs?
Well, not quite. Of course, a tax rate of 17 per cent is to be welcomed and will further enable such businesses to retain and re-invest a larger proportion of their profits. But many SMEs are either family owned businesses which provide a living to family members, or entrepreneurial businesses whose owners may wish to build and sell on a business within a generation, perhaps even on a serial basis.
Well I know many of you will be thinking, but haven’t they reduced the CGT rate by 8 per cent, which will help such entrepreneurial owners? Well yes, apart from those who already benefit from entrepreneur’s relief, and indeed ER has been extended to long term external investors.
The effect of previously announced measures
However, important rules announced prior to the Budget mean that entrepreneurs who follow a business model which involves winding up businesses and extracting the profits before going on to the next project – common in the property sector – will find that from April 2016 they may not be able to qualify for CGT treatment at all, and will be taxed at dividend tax rates. This seems an unfair attack on businesses which generate value in this way.
Most importantly of all, dividend tax rates have increased significantly from April 2016. Entrepreneurs who extract profits in this way will face a tax increase of a massive 7.5 per cent, meaning that (even with a 17 per cent corporation tax rate) the overall tax rate attached to corporate profits which are then extracted as dividends could be almost 50 per cent. Indeed whilst the corporation tax rate remains at 20 per cent, the overall rate could be over 50 per cent.
Reductions in the corporation tax rate are of course welcome and will undoubtedly contribute to making the UK an attractive tax location for many businesses. Nonetheless, it appears we have some way to go to creating a welcoming tax environment for entrepreneurial or family businesses who wish to generate income for themselves. There are limited signs in the Business tax roadmap that we are really seeing the development of a tax system which matches the entrepreneurial culture which the Government’s public statements insist they so value.
For further information, please contact Jim Meakin, or your usual RSM contact.