The Ultimate Cure

Comment

The Ultimate Cure

MARK ROWLAND prescribes a possible remedy for non-corporate distribution complications.

THE NON-CORPORATE distribution rate has been introduced to prevent 'tax avoidance' by micro businesses using the nil rate band on the first £10,000 of profits. The amounts involved for each business are small, but apparently there are so many taking 'advantage', these small amounts add up to a large amount for the Treasury. This was all pointed out to the Government when the nil rate band was introduced, but such observations were ignored.

Mike Truman in his article '19% Nonsense', Taxation, 26 August 2004 at pages 541 to 543, speculated that political reasons were behind the decision not to get rid of the nil rate band. Instead we have the non-corporate distribution legislation designed to 'cure' the tax avoidance.

Rebecca Benneyworth in her article 'A More Balanced Footing', Taxation, 26 August 2004 at pages 550 to 552, pointed out some complications and anomalies that arise from the introduction of non-corporate distribution. So is it possible to circumvent this legislation?

The obvious solution is to ensure that there is no non-corporate distribution. If there is no non-corporate distribution, there cannot be an adjustment to the corporate tax rate. Not having non-corporate distributions is only half the story, as clients will want to get money out of their company without much, if any, further tax liability. For some clients this can be considered to be the same problem as turning income into capital and, rather helpfully, a blueprint for an answer can be found in Commissioners of Inland Revenue v Cleary 44 TC 399.

Example

Doctor X is the 100% shareholder in ABC Ltd, having held shares for

over two years.

Company share capital £100

Accumulated profits £9,500

Total £9,600

On 1 April 2005, Doctor X sells her shares in ABC Ltd for £9,600 on a deferred basis to a company that she has just formed, Hold Co Ltd. On the same day, ABC Ltd ceases to trade and Hold Co Ltd starts to trade.

From a corporate tax perspective, the legislation is set up with the idea that a succession to trade should be tax neutral. However, crucially there has been no distribution and thus the non-corporate distribution rate cannot apply. Looking at Doctor X's personal tax position, she is due to receive a capital amount of £9,600 that is initially taxed as capital. Shares in most micro businesses will be eligible for the full rate of business asset taper relief.

If Doctor X were a higher rate taxpayer, she would initially be in a better position than she would have been had she received a dividend. At most there would be £950 extra tax to pay. If Doctor X has no other gains in the year and the gain on this transaction is less than the capital gains tax annual allowance, she should not be any worse off from a tax perspective as compared to her position prior to the non-corporate distribution legislation, whatever her highest rate of taxation is.

The decision in Cleary shows that what is now section 703, Taxes Act 1988 should normally apply in such a situation. However, section 703 assessments need to be raised by the Revenue as the taxpayer is under no obligation to self assess section 703 tax. The Revenue is not in a position to issue a large number of section 703 assessments, let alone spot them. Even if it does raise an assessment, this would be on the basis that Doctor X had received a normal dividend. There is no mechanism to adjust the corporate tax rates for the companies concerned. Thus Doctor X would be back to the same position as prior to the non-corporate distribution legislation.

There are many issues to be considered, not only tax, if such a strategy were employed. In addition, I would expect that the procedure would need to be repeated on a regular basis. But I believe that these can be overcome in the same entrepreneurial way that tax practitioners dealt with the logistical issues of incorporating micro businesses.

It appears that for some, the non-corporate distribution legislation can be avoided and for others there is an outside chance of getting into a better position than with a normal dividend. Meanwhile the Revenue's cure has provided another spotlight on the advantages of turning income into capital.

Mark Rowland FCA, ATII, BSc(Hons) is enjoying a summer of sport.

--------------------

Specialists in Senior Appointments. Contact us at www.integralsearch.co.uk

Issue: 3976 / Categories: