Corporate taxation and distributions for OMBs
Bob Crawford CA outlines the need for tax planning on behalf of owner-managed businesses when there are significant tax differentials between income tax and corporation tax rates.
Since I first entered the world of taxation for SMEs, the interaction between taxable corporate profits; distributions and personal income tax rates has been inextricable! Nothing has really changed over the years and indeed it could be said that currently matters have, in theory, moved the pendulum to only having corporate profits with the decreasing tax rate of 18% p.a. proposed, whilst the direct income tax and national insurance rate hovers around 50%. Paying either 18% or 50% is a no brainer in the tax world I inhabit!
But matters are not so simple, because at some point an extraction of the post-tax accumulated profits of the company will be required, whether it is now or in several years’ time and of course the current rules could have changed in the interim.
There could be a corporate sale (within or without the family circle) which may be attractive to obtain the 10% CGT Entrepreneurs’ Relief rate. And a 10% tax rate is clearly better than either an 18% or 50% tax rate.
However, if taxable income or dividends have to be taken, there are always then the plethora of other reliefs contingently available whether they be the purchase of a commercial building; pension contributions; qualifying payments into an EIS arrangement; property investments in deprived areas; research and development allowances etc.
It is somewhat contradictory that, within the respective limits, the larger the amount involved which is trying to be sheltered from taxation, the ‘easier’ it is to shelter it, or at least minimise the relevant tax payable on it. Let me clarify this. If the ‘income’ to be tax managed is only £100 why do anything at all? The costs will absorb the net of tax balance of, say, £55. But if the ‘income’ is, say, £1 million and the effective tax rate can be dropped from, say, 50% or £500,000 to, say, 10% or £100,000 there is quite an incentive to seek to arrange matters to achieve that significant reduction. Even more so the higher the amounts being ‘distributed’.
But we are now being advised that ‘tax avoidance’ is no longer apparently socially acceptable. Everyone has to pay the right amount of tax at the right time, whatever the former and the latter actually mean!
Most people in the UK know that if you only have a basic level of employment income there is little available to you to avoid or defer tax. You pay your tax monthly and that should be it under the PAYE rules. On the other hand, if you are in line for a big bonus whether one-off or annually, maybe a salary sacrifice will be better for you; or a pension contribution or …!
There is no doubt that the UK’s tax laws are complicated. As we in the tax advisory industry have been saying for a long time, complication brings with it planning (not avoidance of course) opportunities!
‘Plus ça change, plus c'est la même chose’, as our current European colleagues say!
ICAS Current Tax course
Bob Crawford will be presenting the session ‘Corporate taxation and distributions’ which forms part of the one day ICAS flagship course ‘Current Tax’. Find out more about details of the other sessions and booking details.