with Alastair Byrne, of JWP Creers

THROUGHOUT the last decade various governments have positively encouraged businesses to incorporate, offering tax incentives in the form of lower taxation.

Unsurprisingly businesses have incorporated in their droves. Indeed the Companies House register surpassed the 10,000,000 point a while ago.

Having opened the stable door, various attempts have been made to close it again. These have included the much-feared and under-policed IR35 legislation and last year’s dividend tax. With corporation tax rates going down to 17 per cent in 2020 and likely to be 15 per cent thereafter, the pressure to incorporate is likely to keep pushing the barn door open again.

In that context the Chancellor expressed concern about the tax lost to the Exchequer through incorporation.

Incorporating a business can reduce tax revenues in two ways: by allowing the business owners opportunities to structure their remuneration in ways which reduce the total tax bill, and by offering the possibility of deferring some tax charge by retaining funds in the company until needed. Retained funds may ultimately be extracted as a capital gain at lower rates of tax in some cases.

The Chancellor indicated that the Government is looking at ways of addressing these tax advantages. One idea that has been considered by the Office of Tax Simplification is some form of “look-through” taxation for small companies.

This would effectively treat some companies as sole traders or partnerships, so that the companies’ profits would be subject to income tax as if they were earned directly by the shareholders.

Such measures would undoubtedly level the tax playing field, but faces major obstacles due to the real legal differences between the business forms, and cannot be made quickly.

It is likely that the rates of dividend tax may therefore be adjusted on a regular basis to try and take up the slack.

On the deferral side, we may see a return to the close company apportionment rules of the late 1970s and early 1980s, where additional tax was chargeable on retained profits.

Potentially relief could be obtained where the company reinvested its profits in the business, or paid dividends at a later date. This may be of particularly relevance for property businesses reviewing their structure in the light of the buy-to-let interest deduction restrictions.