Today's 'emergency' budget has left much to think about, especially in terms of those who are thought to have lost out through changes to tax credits and other parts of our welfare system. And, indeed, there will be much pain in some quarters, but before I dive in, I'd like to take a closer look.
In the meantime, one thought springs to mind...
One of the least successful budget proposals from Gordon Brown's time as Chancellor was the introduction of a 0% rate band for corporation tax, whereby the first £10,000 of taxable profit was free from tax. Combined with divided changes that meant that, for basic rate taxpayers, there was effectively no tax paid on dividends (the tax credit is calculated by grossing up the amount paid by 11%, but no money is actually handed over). That led to an explosion in the number of limited companies formed.
Good, you might think, people taking control over their own lives. Well, yes, if you were genuinely setting up a new business. However, if you were moving from being an employee to being a director of a limited company doing the same thing, you were moving out of an environment whereby you had paid holiday time and sick pay, and into an environment where you had to make your own pension provision and ensure compliance with tax legislation, i.e. employ an accountant.
The evidence was that it was good for employers and service industries, not so good for individuals, as it moved liabilities away from big companies and placed them on much smaller, less resilient ones. And, from a government persepctive, it meant less income, and greater risk, as a limited company can walk away from its debts with little risk to the directors. It wasn't great for existing small businesses either, as their cashflow was at greater risk.
One wonders whether the introduction of the new £5,000 tax free allowance for dividends, combined with the reduction of the basic corporation tax rate to 18% will have the same effect.
In truth, getting impartial advice on whether or not to form a limited company is hard to find. Accountants have an evident conflict of interest, in that the fees they can charge for corporate accounts is higher, and they experience no personal risk one way or the other. The impact of becoming a company director is not always obvious and, in an environment where most people are surprisingly unsophisticated in terms of their personal finances, the headline impressions given by tax changes can appear awfully alluring.
Yes, you may pay less tax, but your obligations are heightened - have you seen the new Companies House penalty regime for failure to file accounts in good time? - and you are on your own if things go wrong. That works for some people, but not for others. And, frankly, most people aren't good at tax, which is good in many ways - a world dominated by accountants and tax officials is not my idea of paradise - but is potentially perilous in terms of domestic finances.
So, watch that space, although it will take a few years for the actual effects to make themselves known...
A fair and interesting point
ReplyDeleteIs there any statistic available whether businesses established after the introduction of the 0% percent rate were significantly less sucessful than others before?
Leaving that point I think that the positives you outlined actually outweigh the negatives (though I am biased as someone who still does some accounting himself)
Which leads me to a rather radical idea...
Cooperation tax is not a consumption tax yet its rate is in no way progressive. Given Tim Farron's recent focus in SMEs how about a lower rate of say 10% on profits am smaller than 50000£ and possibly even some sort of threshold for self-employed/very small businesses.
A nice way to support SMEs,easily to be labled as both pro-business and fair but probably unaffordable without a hike in the top rate-a massive incentive to move abroad for bigger businesses.
Anyway, any idea how much a reduced SME rate would cost?
Josef,
ReplyDeleteIn truth, I don't know, although the lifespan of limited companies post-change appeared to be much shorter - I worked in corporation tax administration in those days. But to give you an idea as to the acceleration in the rate of company formations, more companies were incorporated in the twelve years after the change than there had been in the previous 110 years.
Sadly, in that period, I encountered too many people who had gone to a corporate structure on the advice of their accountants without any more than a vague comprehension of the implications, in terms of both administrative burden and of future finances.
On the question of its progressive nature or otherwise, the move towards equalisation of rates has made it less progressive. However, what you propose is little different to the position ten years ago, before Alastair Darling moved towards rate equalisation.
How much would it cost? Hard to tell due to the intangibles - how many people would move from employment to effective self-employment, with the commensurate drop in PAYE take (a tax which is relatively cheap to collect and is hard to evade)? And I think that it is the intangibles and the risk to government (how can you ensure that the self-employed make suitable provision for their old age, for example) that make it a risk that hasn't tempted George Osborne thus far.
Thanks for that. The amount is staggering indeed and reminds me of the German 'Agenda 2010', which put 268000 people on jobseekers allowance into selfemployment within 3 years before the incentive was abolished-for pretty much the reasons you've given.
ReplyDeleteI must admit that I was a student in Germany 10 years ago and hardly interested in UK politics at that time. Nonetheless thanks for that clarification, having taken a quick look at wikipedia progressive taxation of cooperations didn't appear to be the norm in Europe.
I think it's hard to get an idea of the costings without enough precedents, which may give an idea about the risk to government as well. However a reduced rate rather than a 0% rate may be worthwhile and would primarily help existing SMEs whilst being a smaller incentive for selfemployment.