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Planning for the overhaul of dividends taxation
The chancellor George Osborne wasn’t exaggerating when he said he was undertaking a ’major and long-overdue reform to simplify the taxation of dividends’ and we need to plan for the spring overhaul, writes Tracy Jenkins of HWB
The current dividend system was set up more than 40 years ago to avoid the double taxation of profits. At that time, corporation tax was more than 50% which meant some individuals saw an 80% tax on their dividends.
Today corporation tax is 20% (and is due to fall to 18% from April 2020) but the taxation of dividends has remained unchanged, which has provided owner-managed businesses with financial incentives to incorporate and extract profits as dividends.
The chancellor has said that the Government cannot reduce corporation tax further while there are “rapidly growing opportunities for tax planning“. So what can we expect from the overhaul of the “complex and archaic system“ of tax dividends in April?
The final rules are still subject to legislation but HMRC has released a factsheet of how it envisages the rules will apply and there are four main changes:
• The 10% dividend tax credit will be abolished.
• Individuals will have an annual tax-free dividend allowance of £5,000. This
allowance will not reduce total income for tax purposes and will only apply to dividend income.
• Dividend income exceeding the annual allowance will be taxed according to an individual’s income tax band. Basic rate taxpayers will pay 7.5%, higher rate taxpayers will pay 32.5% and additional rate taxpayers will pay 38.1%.
Businesses are missing out on valuable tax breaks
Small-to-medium businesses are missing out on valuable tax breaks for research and development simply because bosses are unaware that they qualify.
Despite a surge in R&D tax credit claims submitted to HMRC, thousands of eligible companies are not participating, says Paul Duckworth, a partner in tax services to businesses at the Southampton office of Smith & Williamson, the accountancy, investment management and tax group.
He said new HMRC figures put the value of R&D tax credits at £1.75 billion for 2013/14, the latest figures available, with total claims going up by 19% and those submitted by small and medium enterprises (SMEs) up by 23%.
He said: “However, that leaves thousands of businesses missing out on an incredibly valuable source of funding – especially those in the early years of trading and often under pressure from a cashflow perspective.
“These business owners are either unaware of the potential benefits of R&D tax credits or possibly think they do not qualify. This might be
costing them vital funding if they are spending money innovating and advancing technology.“
R&D tax credits, first introduced in 2000, allow companies incurring costs in developing new products, processes or services to receive a cash payment or tax deduction. The average annual claim for an SME claimant in the UK is £48,000.
Duckworth said that from April 1 this year the Government increased the SME R&D uplift on qualifying spend to 230% and the rate of tax credit repayable on surrendered losses for large companies to 11%. He said: “Loss-making SME businesses are now eligible for a repayment of up to 33% of qualifying expenditure, whereas those which are in profit can save tax at the rate of 46% of qualifying expenses.“
SMEs can benefit from an enhanced rate of R&D tax credits compared with larger businesses. To qualify, SMEs must employ fewer than 500 people and have either an annual turnover of no more than €100 million or a balance sheet total not exceeding €86m.
“However, there has been a 10% decline in SMEs claiming both payable credits and a
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – DECEMBER 15/JANUARY 16
deduction from the corporation tax liability, potentially due to unawareness that the two can be combined,“ said Duckworth.
He added that many sub-contractors working for larger companies were unaware they could claim (just 660 claimed out of 3,950 large company scheme claims made in the 2013/14 tax year) – compared with 16,160 SME R&D claims in the same period.
Duckworth said some industry sectors were lagging behind and yet to capitalise on the benefits of R&D tax credits – with construction and real estate and finance and insurance amounting for just 2% and 1% of the total.
“This is surprising considering the technological developments in construction methods, the advent of online estate agents and the increasing automation of many financial services as IT projects often qualify for the R&D tax credits.“
R&D claims by finance and insurance SMEs in the tax year 2013/14 averaged £88,000, significantly higher than the national average of £48,000 for all claims.
www.businessmag.co.uk
• No tax will be deducted at source. It will be paid through self-assessment.
Dividends paid within pension funds and those received from shares in ISAs will remain tax-free. Also, the £1,000 savings allowance (£500 for higher-rate taxpayers) due to come into effect in April excludes dividend income.
The Government predicts that 85% of people will pay the same or less tax under the new rules. However, basic rate taxpayers will either pay the same amount of tax or more. For higher-rate taxpayers, some will pay more and some will pay less.
A higher-rate taxpayer receiving less than £5,000 in dividends, will pay less tax under the new regime. Some higher-rate taxpayers with dividends above this will also benefit but once dividends exceed around £21,666 then they are likely to pay more under the new system.
It is important to approach strategies to minimise dividend tax with caution and to seek professional advice before making any decisions.
Details: Tracy Jenkins 023-8046-1202
tracy.jenkins@
hwb-accountants.com www.hwb-accountants.com
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