By Ian Abrey
The final Spring Budget produced a lot of hot air but very little substance in the field of taxation. While this is not necessarily undesirable – the tendency of Chancellors to feel they need to continually tinker with tax rules and rates is a constant source of annoyance to many – the changes that have been made are somewhat disappointing.
The main feature was more polemic in the continuing attacks on the taxation of small businesses which is becoming a familiar theme in Chancellor’s speeches. This ignores the fact that small businesses contribute a lot to the economy in terms of wealth creation and employment. The record employment figures the Chancellor touted in his speech would not have been achieved without the contribution of such entrepreneurial businesses. Yet, while the Chancellor is happy for large multinationals to pay on 17% corporation tax from 2020 (when they admit to making profits in the UK at all) he considers this rate of tax to be unacceptable for smaller incorporated businesses.
His attack on the incorporated businesses and the self-employed also ignores another fact. Many people are self-employed or use their own company because other companies are unwilling to take them on as employees because of the extra costs incurred – not just taxation but holiday pay, sick pay and maternity/paternity rights etc. Although the UK’s position in this field is nowhere near as constrictive as some of our EU neighbours, it is still economically attractive for companies to engage with an individual as a self-employed person or through his personal company.
The Revenue’s own rules encourage the latter: if there is a dispute about someone’s employment status engaging a self-employed individual can leave a company with a large tax bill, whereas the risk lies with the individual if he is using a personal company.
There are many reasons for operating through a company which have nothing to do with tax – the protection of limited liability, easier access to finance being just two. If the Chancellor dislikes the tax incentive that incorporation provides there is a simple solution: reduce the vast disparity between the income and corporation tax rates. A successful entrepreneur will pay 17% corporation tax on profits if he incorporates but up to 45% (plus national insurance) if he trades as a sole trader. If he is ploughing profits back into the business to grow it that is a big advantage.
The £5,000 pa dividend allowance was announced in the 2015 Summer Budget as part of this campaign against incorporated small businesses. Nothing has changed but, within a year of its introduction, it is being cut to £2,000 pa. This change demonstrates a lack of foresight in the Treasury: does it also presage further changes to the rate of taxation on dividends?
Finally, the Chancellor announced four major areas where he was cracking down on tax avoidance. The only two for which detailed estimates were available at the time of writing (a clampdown on transfers to offshore pensions – QROPS – and a limit on the conversion of capital losses to revenue losses in very limited circumstances) will yield only £80m between them by 2020. Does this suggest tax avoidance is a thing of the past and that lengthy tax anti-avoidance legislation is a thing of the past? I fear not but the prominence given to these measures did seem somewhat excessive.