Ritson Smith hot topic: changes in corporation tax rates and allowance for small companies

The following article has been prepared by David Dowell, senior tax manager with Aberdeen-based accountancy practice Ritson Smith.

Corporation tax rates/first year allowances

In the 2006 Budget, the Chancellor confirmed the abolition of the nil rate starting band of corporation tax on taxable profits up to £10,000.  He also confirmed the abolition of the non-corporate distribution rate on profits distributed out of a company, this generally affecting any company making taxable profits below £50,000.

The changes took effect from 1 April 2006 and returns the situation to the status quo that existed prior to 1 April 2002. Now, taxable profits from £1 up to £300,000 will simply be taxed at 19%.

The rate of first-year allowances for expenditure by small businesses on plant and machinery has been increased from 40% to 50% for expenditure incurred between 6 April 2006 and 6 April 2007.  This is intended to compensate those businesses affected by the abolition of the nil rate band mentioned above but to take advantage of this effectively means needing to reinvest in the business.

Small businesses are those satisfying any two of the following conditions: turnover not more than £5.6m; assets not more than £2.8m; and no more than 50 employees.

Concerns for the future of dividends paid by small companies

The Chancellor also reasserted in his 2006 Budget report comments he had made previously that the government intended to keep under review the effect of tax and national insurance in relation to dividends paid by small companies.  Currently, dividend payments do not attract national insurance contributions, whether by employer or employee.

A consultation will begin in May this year to consider actions to be taken to tackle disguised employment through managed service company schemes or composite companies.  These companies are common in both the construction and supply agency sectors and are often used to pay a minimum wage as salary with the remainder of the profits being taken as dividend.

Whilst there is nothing to suggest the treatment of dividends paid by small companies will change in the near future, given the increasingly intolerant stance adopted by the government, changes in future cannot be discounted.

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