Saturday 12 June 2004

Corporation Tax Decision

By far the most relevant Budget announcement as far as smaller businesses are concerned is the fact that many smaller limited companies will be hit by a higher Corporation Tax bill if they distribute their profits by way of dividend as the majority do. At present, such companies pay no Corporation Tax if their profits do not exceed 10,000, and a sliding scale rate which gradually increases to 19% on profits of 50,000 or more. This situation (which was only introduced quite recently) triggered a rash of incorporations on the part of smaller businesses and Mr Crown now regards this as a "loophole".

In some ways the new rules are a relief because it was strongly rumoured before the Budget that dividends from private companies would be subject to National Insurance Contributions without limit. This would have been very unfair and costly.

Under the new rules, if the profits are distributed by way of dividend, the rate of tax on the distributed profits will be 19%. This could cost smaller limited companies (those with profits of 50,000 a year or less) up to 1,900 per year in additional Corporation Tax.

What is not yet entirely clear is how dividends will be matched with profits in applying the new rules. This will only be completely clear when the Finance Bill containing the detailed rules is published in the coming weeks.

A summary of the Budget is available at www.bakertilly.co.uk


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