There were no major changes to corporation tax that took effect from 1 April 2009. The mainstream rate of corporation tax will remain at 28% for the next financial year, while the small companies' rate is set to rise to 22% in 2010. However, there were useful temporary changes to business tax.

Trading losses

The Budget increased the timeframe of the PBR proposals to extend the carry back of losses for companies and unincorporated businesses. A trade loss may now be carried back for a period of three years, rather than just to the immediately preceding year. Only a maximum of £50,000 may be carried back beyond the immediately preceding year, and then only when profits for that year have been offset in full. These rules apply for company accounting periods ending between 24 November 2008 and 23 November 2010 and for tax years 2008/09 and 2009/10 for unincorporated businesses.

Capital allowances

T here was two important revisions to capital allowances:

•  Cars A new capital allowance structure based on CO 2 emission levels now applies for cars. For newly acquired cars with emissions of more than 110 g/km up to 160 g/km, there is a 20% writing down allowance, with no cash ceiling. For higher emission cars, the writing down rate is 10%. Cars with emissions of 110g/km or less qualify for 100% first year allowances.

As a consequence, the special rules that restrict the amount of car lease rental payments that can be deducted for tax purposes have been changed. The restriction is now a flat rate disallowance of 15% of relevant payments and this only applies to cars with CO 2 emissions exceeding 160g/km.

•  New first-year allowance There is a temporary first-year allowance of 40% for most investment in plant and machinery for one year only from 1 April 2009 for companies and 6 April 2009 for unincorporated businesses,. This allowance will apply where investment exceeds the £50,000 100% annual investment allowance and represents a doubling of the standard 20% writing down allowance.

Income-shifting

The controversial subject of ‘income-shifting' received a brief mention, with a reminder that the government is keeping the matter ‘under review'.

Dividends or Salary ... or Pension Contribution?

The changes to the NICs and the new higher rate threshold have altered slightly the mathematics of the choice between dividends and salary. Nevertheless, if you are in a position to choose between the two and not caught by the IR35 personal company rules, a dividend remains the more efficient choice, as the example below shows.

Still Worth It Brian has £50,000 of gross profits in his company which he wishes to draw, either as bonus or dividend. Assuming the company pays corporation tax at the 2009 small companies' rate of 21% and Brian is already a higher rate taxpayer, with annual earnings in excess of £43,875, his choice can be summarised thus:   Bonus £ Dividend £ Marginal gross profit 50,000 50,000 Corporation tax @ 21% N/A (10,500) Dividend N/A 39,500 Employer's National Insurance contributions (NICs) £44,326 @ 12.8% (5,674) N/A Gross bonus 44,326 N/A Brian's NICs £44,326 @ 1% (443) N/A Income tax (17,730 ) ( 9,875 )* Net benefit to Brian 26,153 29,625 * after allowing for 10% tax credit The benefit of the dividend route is due to the savings in NICs; more tax (corporation tax and income tax) is payable under the dividend route.

A point worth noting is that the 50% tax rate and phasing out of personal allowances, both due from 2010/11, suggest that you might want to bring forward dividend payments into this tax year where the necessary funds are available.

Watch your Capital Allowances

The introduction of a 100% annual investment allowance for the first £50,000 of new investment in plant and machinery from April 2008 and the temporary 40% first-year allowance for one year from April 2009 have made the timing of such investment more important for businesses. From April 2010 anything in excess of £50,000 will generally attract only a 20% writing down allowance, so the timing of a major investment needs to be considered carefully.

Past experience of high first year allowances suggests there is a trap to be wary of: investing purely for the tax relief. When 100% allowances were universally available in the 1970s, there were many stories of businesses which bought new equipment that was not needed, simply to save tax. Some of the more apocryphal stories tell of farmers with barns full of combine harvesters gathering dust.

Today's lower limits and much-reduced corporation tax rates should mean unnecessary investments will be rarer. However, as with any investment, tax is a factor, but should not be the driving consideration.

<< BACK

The contents of this Bulletin are based on the proposals put forward by the Chancellor in his Budget speech and explained in documents subsequently published by HMRC and the Treasury.
All Budget proposals may be subject to change before the Finance Act is passed. References to spouse, husband and wife and married couples include references to registered civil partners and civil partnerships.
This Bulletin is provided for general consideration only and no action should be taken or refrained from based on its contents alone. Accordingly, no responsibility can be accepted for any loss occasioned as a result of any such action or inaction.
Professional advice must always be taken.

This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at July 2008. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

Burley Financial Services Ltd is a private limited company registered in England and Wales under company no. 121 7536.
Burley Financial Services Ltd is authorised and regulated by the Financial Services Authority.
We are entered on the FSA Register no 125891 at www.fsa.gov.uk/register