TAXATION

Pre-Budget Report news

The Chancellor’s change of heart on pensions investing in residential property hogged many of the headlines, but there were other - and important - announcements in the December 2005 Pre-Budget Report.

Company tax
Owners of small companies - those with annual profits below £50,000 - should carefully plan the timing of their dividend payments this spring. In his Pre-Budget Report in December, Chancellor Gordon Brown announced the end of the 0% tax rate on the first £10,000 of company profits from 1 April. He also abolished the complex rules that ensure small companies pay 19% tax on profits paid out as dividends to individuals and other non-corporate shareholders. From 1 April, small companies will pay 19% on all their profits.

Paying dividends before 1 April 2006 could increase your company’s corporation tax, depending on its profits and recent dividend history. In contrast, paying dividends from 1 April 2006 will not affect its corporation tax liability.

You should also consider your personal income tax position as a shareholder. In some circumstances, your extra income tax could turn out to be more than the corporation tax saving. Ask us when you should be making your dividend payments. There are three main choices:

Before 1 April - when the current corporation tax rules apply and your income will be taxed in 2005/06;
Between 1 April and 5 April - when the new corporation tax rules apply but your income will still be taxed in 2005/06;
After 5 April - when the new corporation tax rules apply and your income will be taxed in 2006/07.

The reason for the end of the 0% tax rate was, of course, the rush of tax-driven incorporations by sole traders and partnerships when it was introduced in 2002. So should you now stop trading as a company and become a sole trader or partnership? This could be worthwhile for some people, but for others a company still has advantages. The decision will depend on your own circumstances; please discuss it with us.

Capital expenditure
Other aspects of the Pre-Budget Report were better news for business. Small businesses - companies, partnerships and sole traders - will benefit from an increase in the first-year capital allowance from 40% to 50% for one year from 1 April 2006 for companies and 6 April 2006 for partnerships and sole traders. So it might be worth delaying major equipment purchases until then.

Work in progress
Businesses that provide contractual services will be able to spread the one-off extra tax charge on unbilled work, arising from the implementation of a new accounting practice known as UITF 40. Spreading will be over three to six years. We will make sure you get the maximum benefit from this concession, which follows extensive lobbying by accountants, lawyers and others.

VAT
Businesses with turnover up to £1.35 million will be able to make annual, instead of quarterly, VAT returns. This reduces administration, but can be a two-edged sword if it means VAT liabilities and paperwork mount up and it could reduce your cash flow.

You could find that the matching increase in the turnover limit for cash accounting to £1.35 million is more useful. That means paying VAT only on the cash payments you receive rather than all invoices you send out - though this is subject to the European Commission’s agreement.