Changes in Budget 2016 affecting SMEs and Business Owners

Changes in Budget 2016 affecting SMEs and Business Owners

Wed 16 Mar 2016

We consider the impact of the budget on Investor’s Relief and Capital Gains Tax, Flexible use of losses, Directors’ Loan Accounts and the changes Corporation Tax rates.

Investor’s Relief and Capital Gains Tax (CGT)
The news of reduced capital gains tax and the introduction of Investor’s Relief will have been received positively. Investor’s Relief in particular may allow greater access to equity based finance and remove the burden and practical consequences of them having to employ investors in order for them to benefit from the 10% rate of CGT. In particular, as there doesn’t seem to be any minimum holding or employment conditions attached to Investors’ Relief (unlike Entrepreneurs’ Relief) it could be particularly attractive for growing entrepreneurial companies when structuring non-traditional finance such as  ‘crowd funding’ investment projects. In any event, the earliest these shares could be disposed of, even assuming they are issued tomorrow, would be 6 April 2019 – so this definitely counts as ‘jam tomorrow’ for investors.

However, these changes potentially do nothing at all for the SME company which is family owned and may be transferred from generation to generation. For these companies the most significant changes from 6 April 2016 are nothing announced in this Budget but past announcements on dividend taxation (rising broadly by 7.5% from 6 April 2016) plus the technical sounding Transactions in Securities (TiS)rules. The proposed tightening of the TiS rules means that a capital transaction is harder to achieve in the context of continuing ownership of the SME, rendering the reduced CGT rates largely irrelevant.

Flexible use of losses
The announcement that brought forward losses will be able to be used more flexibly will also have been seen as good news for SMEs.  The new rules will give companies the ability to use one type of losses against future profits of a different type, and will also give groups the ability to use brought forward losses against future profits of the whole group, not just against those of the company with the losses. But, to make sure the changes are targeted at smaller companies, for groups with taxable profits in excess of £5m, the amount of profits that can be offset by brought forward losses is to be restricted to 50%.

This sounds great so far, however these changes are still under consultation and will only apply for losses created after 1 April 2017 and so it will not have an immediate cash flow benefit for companies. There may also be an increased compliance burden, both in terms of reporting pre and post April 2017 losses separately on tax computations and where an accounting period straddles 1 April 2017, splitting the company results out into pre and post April 2017. If companies are anticipating making tax losses in 2017 and those losses are forecast to be skewed in favour of the period post 1 April 2017, they might want to consider extending (or shortening) accounting periods to end on 31 March 2017 – subject to taking into account other commercial considerations.

Directors’ Loan Accounts
Close companies have been subject to tax on outstanding loans to ‘participators’ (usually director / shareholders) for many years. The underlying explanation HMRC provide for this tax has always been to try and stop financial benefits of the director / shareholder taking substantial loans out of the company instead of salary or dividends.

The announcement that an additional tax rate will apply to directors’ loan accounts (currently 25%, rising to 32.5% for post April 2016 loans) and the link of the rate of tax to the dividend upper rate is therefore not a surprise and (subject to how this is drafted in legislation) will presumably allow any subsequent increases to dividend rates to also increase tax on loans to participators.

That said, for companies who are already accounting for such loans, the change in rate could create an additional compliance burden (even if just in the short term) with reference in HMRC’s press release to monitoring pre and post 6 April 2016 loans.  There hasn’t really been a need to consider separate loans to the same individual before today and hence it is assumed some guidance / legislation will be issued to clarify whether older loans are repaid in priority to newer loans.

Corporation Tax rates
The further reduction in the rate of corporation tax (falling eventually to 17%) will have been welcomed by SMEs. However, as with many of the positive changes announced today, the timing of this benefit will not be felt until 2020, with the cash impact potentially even later.

So, whilst on the face of it there appears to have been no ‘bad’ news for SME companies today, the positive announcements will take some time to be felt financially albeit may well contribute to increasing the ‘feel good factor’ and the sense that the Government does want to promote growth in this sector. However, they are likely to take comfort in the measures announced to improve their ability to compete with the ‘big boys’ on a more even playing field, by attacking and penalising those large businesses who are seen to exploit certain aspects of the UK tax system.

We saw little of the stealth taxes or “sin” taxes for individual taxpayers and little in the way of major reform of personal taxation. The lowering of CGT rates is interesting as the disparity between income tax and capital tax rates can encourage tax motivated behaviours.

Authors: Melanie Orriss, Graham Odlin, Lindsay Pentelow and Richard Dillea


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