Caution urged for rural businesses considering incorporation says Saffery Champness

Former Chancellor George Osborne’s pledge to lower Corporation Tax from 20% to 17% by 2020 with a lower than 15% target beyond that might make incorporation appear more attractive, but caution is required. So says Alison Robinson, Partner in UK top 20 Chartered Accountants Saffery Champness and a member of the firm’s Landed Estates and Rural Business Group.
She says:

The prospect of reducing Corporation Tax and the additional benefits of incorporation such as limited liability, increased credibility, and a formal business structure, may paint limited company status with an overly rosy glow. However, sole traders and partnerships contemplating a change in structure should be cautious. There is a lot under discussion in this area right now – we don’t even know whether the proposed Corporation Tax reductions will be deliverable by Philip Hammond particularly when Brexit negotiations get underway.

The move to reduce Corporation Tax, designed to attract continuing new investment, could prompt tax driven incorporation according to some commentators, with businesses incorporating and directors taking dividends as remuneration instead of salary.

As of 6 April this year, the 10% notional tax credit on all dividends was abolished and instead a £5,000 tax-free limit introduced, with rates chargeable above that of 7.5% for those in the basic rate Income Tax band, 32.5% higher rate, and 38.1% additional rate. Under this mechanism however even those on the lowest rate could be worse off and be paying more tax.

Also, the regime for the future taxation of small businesses remains under discussion. The Office for Tax Simplification (OTS) is currently reviewing how small businesses are taxed saying that many spend too much time and money sorting out their tax or paying someone to do it for them.

Alison Robinson says:

The OTS is currently consulting on proposals for Lookthrough Taxation for small businesses where Corporation Tax would be dropped and individuals taxed directly under Income Tax and Capital Gains Tax rules. OTS sees such a structure as beneficial to firms that are one person businesses or are stable in terms of size, that distribute all or most of their profits, and that have few assets or the need for investment funding.

The final report on the OTS Small Company Taxation Review is due for publication this October.

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