The summer 2015 budget introduced the biggest changes in SME taxation for over 20 years. In summary, there will be a significant increase in most business owners’ tax bills. This brief note is to outline what those changes are, and what the likely impact will be.
And of course, because we are who we are, there are some suggestions on how you could mitigate some of the increases.
But first some accounting news….
New accounting rules mean change in the way some assets and liabilities are measured, and how changes in valuations have to be accounted for. This could mean that reported profits are much lower in future, even with the same underlying performance.
FRS102 took effect from 1 January 2015, but only applied to SMEs after the FRSSE was withdrawn in July 2015. FRS102 applied to SME accounts from 1 January 2016, but you can adopt early if you want (i.e. in line with all other businesses from 1 January 2015).
FRS105 (for micro entities that are limited companies) becomes effective on 1 January 2016 as well.
The biggest concern with these changes is the potential impact on reported distributable profits. If distributable reserves are reduced to a low level, then dividends become illegal, and with it, tax bills will increase.
The implication of negative reserves
While it initially seems like “it’s only accounting”, the potential implications are horrendous.
- Negative reserves may mean that dividends voted during the year are illegal. In certain circumstances, typically a later insolvency of the business, those dividends can be demanded back to pay creditors.
- It opens the door to HMRC arguing that the “dividends” were in fact disguised wages/salaries, and imposing large national insurance and income tax liabilities.
- Banks and other funders will not necessarily appreciate the nuances of the changes. If the figures look bad, you look a bad credit risk. At the moment (Summer 2015), we are finding it very difficult to raise funds from any traditional source, for any client, for any purpose.
The Chancellor announced a wholesale change in the taxation of dividends in his July budget. The “tax free” status of dividends received by basic rate taxpayers has gone, to be replaced by an annual tax free amount (£5,000), and a tax charge of 7.5% for basic rate payers, 32.5% for higher rate payers (up from an effective 25%) and 38.1% for additional rate payers.
For a business owner, drawing a minimum wage salary, and topping up dividends to their basic rate tax limit, one estimate suggests that the tax bill will rise by nearly £2,000.
Currently, any business can benefit by up to £2,000 per annum by claiming the Employment Allowance. From April 2016, the limit increases to £3,000, but director only companies can no longer claim it. This will change the tax efficiency of salaries up to the current/then income tax allowance.
The immediate decision
Company owners will have to look very carefully at whether to take a large dividend before April 2016, and smaller ones thereafter. They may incur a one off higher rate tax liability in 2015/16, because they will enjoy lower tax bills in future years. However…….
The accounting changes, which usually require comparative figures to be restated, may mean the capacity for a large dividend is much reduced, or even removed.
Before the immediate decision
So before the immediate decision, companies will have to assess the impact on their results and reserves of the new rules. Some companies will win, meaning that early adoption may prove beneficial (but watch to see if this means bringing forward a higher corporation tax bill). For most though, the changes could mean tougher times ahead.
And we haven’t even started on the prospect of higher staff costs (auto-enrolment, living wage) and interest rate rises!
Help is at hand
We are offering a fixed price review to consider the direct impact of all these changes on your business, and your personal tax position. For a fixed fee we will:
Review the impact of FRS102, and the availability of FRS105 on your business, and its ability to pay dividends
Consider your dividend requirement for the next three years, and advise you on a tax efficient way to deliver them (assuming other rates and allowances remain unchanged)
Assess the impact on your costs of the new Living Wage, auto-enrolment and increases in interest rates
Report to you on some simple ways in which some of these cost pressures can be alleviated.
Of course, some of these changes may not affect you, and therefore, our pricing structure allows you to pay for just those elements that affect you most.
Please email us at firstname.lastname@example.org if you’d like to commission a review. You’ll need to act quickly, because the anticipated demand for this means we’ll be withdrawing the fixed price offer at the end of October 2015.