The main tax-raising measures announced in the Autumn Statement (as summarised by us here) quietly but very effectively raise revenues from ‘fiscal drag’ – the effect of freezing most allowances and tax bands in cash terms. The effect is particularly rapid and pronounced in times of relatively high inflation.
As well as sharing in the general pain suffered by all taxpayers in that regard, SMEs and their owners may be particularly affected by the freezing of the threshold for Employers’ National Insurance Contributions (‘NICs’) and the reduction of the annual allowance for Capital Gains Tax.
The reduction in the dividend allowance adds a small amount to the cost to an SME of trading as a company, but the previously announced increase in Corporation Tax rates from 1 April 2023 is likely to affect trading companies (especially small groups) much more than anything in the Autumn Statement.
Differential rates of Corporation Tax as between smaller and larger companies are nothing new: that was the norm between 1973 and 2014. What’s different this time is where the bands sit. The 19% rate applies only on profits up to £50,000, with a marginal rate of 26.5% on the next £200,000 and 25% on the balance. For comparison, the equivalent bands in 2014, which had remained the same for 20 years, were £300,000 and £1.2m. So, many more companies will be affected by the 2023 version of differential rates than was the case a decade ago.
Further, these limits are reduced where there are ‘associated companies’. Four active companies in a group will, for example, result in each starting to pay a higher rate of tax once profits exceed £12,500. In future we might expect to see a greater use of LLPs rather than subsidiary or associated companies to ring-fence areas of business. And the 19% rate won’t apply at all to ‘close investment-holding companies’: happily, this term doesn’t (yet?) include property investment businesses.
The interaction of a multiplicity of rates of Corporation Tax, Income Tax (including the 1.25% uplift in rates of dividend tax that the government ‘forgot’ to reverse) and NICs, together with the reduction of the dividend exemption, make it difficult to determine where the tax balance now lies, and may in future lie, between extracting profits by way of dividend or by way of remuneration; or, in a more extreme case, to evaluate the merits of disincorporation. Since the latter may also risk falling foul of the ‘Targeted Anti-Avoidance Rule’ on liquidations, operating a business as an LLP involving a company and its proprietorial family as an alternative to full disincorporation may also be worth investigating.
So, while the Autumn Statement itself may have contained little to pique our interest, that doesn’t mean that we expect to have nothing to do over the coming weeks and months!
For more information, please get in touch with your usual BKL contact or use our enquiry form.
Our Autumn Statement 2022 coverage also includes:
- Key tax announcements
- Core Schools Budget Uplift
- A video in which our tax experts explore what the announcements mean for individuals and businesses