Corporation tax for small companies – What Labour has in store?

20th January 2014

Corporation tax for small companies – What Labour has in store?

 

Last year the announcement at the Labour party conference that the higher rate of corporation tax would be restored to its previous levels if they win the next election was passed off by many small company owners as an irrelevance, as their profits are well short of the £300k limit where the higher rate starts to apply and there was no suggestion of any increase to the lower rate of 20%.

However this overlooks the rule that splits the £300k limit between companies that are “associated”, which generally means that they are controlled by the same persons. So if you have (say) two business operations, and have decided to “ring fence” them by running them through separate companies, each company will be limited to £150k of profit at the lower rate.

This rule is present to prevent company owners from ‘fragmenting’ their business into multiple companies as that each one stays below the £300k profit limit.

Because of the reduction in the higher rate of tax which the coalition is gradually introducing, this problem is fast disappearing. From 1 April 2014, the higher rate will be 21% and therefore the effect of profits straying over the limit will be quite small. Accountants have therefore been advising clients that they can be more relaxed about setting up additional companies if it is commercially advisable.

Now this advice will need to be provided with a “Change of Government Health Warning”, providing another layer of uncertainty for small business to deal with.

 

For more information please contact the author, Peter Hedgethorne, Director.

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