New money
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The new year is an obvious time to take stock of your finances. CM has been taking a closer look at the recent Budget to assess the impact it will have on operators and to find the few roses among the thorns.
Corporation tax
With the possibility of a general election soon, it was no surprise that most of the autumn Budget handouts went to individuals, with little being set aside for businesses. However, a positive aspect for most companies is the reduction in the small companies' rate of corporation tax to 24%, This mirrors the reduction in basic rate income tax and applies to the first £300,000 of profits, so it should be of some help to the family company. Where a company has associated companies, a single £300,000 limit is shared equally between all the companies. For profits in the marginal relief band from £300,000 to £1,500,000, the effective rate of tax increases slightly from 35% to 35.25% because the band has not been widened.
Landfill tax
This comes into effect only October 1996. The standard rate of tax will be £7 per tonne of waste deposited at a landfill site, with a reduced rate of £2 per tonne for inactive waste which does not decay, pollute groundwater or contaminate land. There will be no exceptions from the tax. Although it will be deductible for corporation tax purposes it will increase the cost of disposing of trade refuse. However, the .E7-atonne charge is lower than had been anticipated.
Loans to shareholder directors
One piece of good news for family businesses is the change in the rules on loans to shareholder directors.
In effect these rules require a company to make a loan to the Inland Revenue equal to 25% of the shareholder's loan. In practice very little tax is collected under this provision but a great deal of interest on overdue tax is This is because in small companies it is common for shareholder directors to draw money throughout the year without giving any thought to its status, and leave it to the company's accountants to sort out the position after the end of the year: the shareholder's loan account is usually cleared by voting a loan as dividend. The tax is due 14 days after the end of the company's accounting year, and the Revenue was seeking interest for the period from the due date until the date the accounts were approved, on the basis that they ought to have been paid the tax, but would have had to repay it to the company at the time of approval of the accounts. The due date for such tax has been moved to nine months after the end of the accounting period, so no tax, and no interest on overdue tax, will in future be due if the loan is repaid by that date. In practice this will almost certainly be the case as the accounts need to be finalised by then to work out bow much corporation tax is owed.
Inheritance tax
Further good news for the small business is the expansion of the 1000 inheritance tax business property relief to all shareholdings in unquoted trading companies. This relief effectively exempts the shares from inheritance tax and should help with tax planning for small family companies. The unincorporated business already attracts 100% relief and there is no change in the 50% relief for assets, such as a property, held outside the family company but used by it in its trade. Hauliers ought to consider transferring such assets to the company, although that does have the effect of exposing these asset to the claims of creditors. In any case the substantial increase in the starting point for inheritance tax to .£200,000 eases this problem.
Pensions and employee shares
The increase in the pension scheme earnings cap to £82,200 is merely in line with inflation. The promise of consultation over increased flexibility for occupational pensions to allow a smaller pension to be taken at retirement and a larger one later is welcome. The changes to all employee share schemes are unlikely to be much help—the problem with such schemes is not that employees cannot afford to save £10 a month, or are not prepared to wait five years for their shares, but that employers are not interested in a lot of tiny employee shareholdings. The reintroduction of employee share options, albeit with a much reduced 420,000 limit and a requirement to issue the shares at full market value, is of greater help to employers who want to provide share incentives. However, this system will be of most interest to listed companies: small family businesses are unlikely to want to create very small employee shareholdings. As promised, the withdrawal of the old executive share schemes does not affect options granted before 17 July 1995. Options granted under such schemes between then and Budget day, and which meet the new rules, will also attract tax exemptions. Unfortunately, as noone knew this would be the position, it is unlikely that many options will have been granted—and it is particularly unlikely that such options will meet the new condition that they must beat market value.
VED
Operators will applaud the decision to freeze LGV vehicle excise duty but, like everyone else, they will be hit by the increase in the duty on petrol and diesel which is bound to push up distribution costs.
VAT
For very large businesses the changes in the VAT Payment on Account Scheme appear attractive, but this is unlikely to be the case as the Government expects to generate £600m from them in the next financial year. The reason is a requirement for such businesses to pay their VAT by electronic means. The increase in the VAT registration threshold to £47,000 does no more than keep pace with inflation.
National insurance contributions
The reduction in the employer's national insurance contributions is only 0.2%; a small but nevertheless welcome change, as is the further reduction in the cap on business rates. No doubt this will be welcomed by those whose rateable value increased in the 1995 rating revaluations.
Personal allowances
As for the private individual whose spending affects the prosperity of any business, the personal allowance tax threshold has been increased by £240; the 20% band has been widened by £700; the basic rate of income tax has been reduced to 24%; and the point at which higher rate tax becomes payable has risen to £25,500 of taxable income.
Conclusion
Overall there is very little comfort for businesses, except for the fact that more money in the pockets of consumers can only help all businesses and the Chancellor has opted to limit the tax reductions—before the Budget there was a widespread fear that over-generous tax reductions might fuel inflation and push up interest rates.
El by Robert W Maas
Robert W Maas is a partner m the leading City firm of accountants, Blackstone Franks &