Pretty much business as usual for owner managers
Most owner managers should be reasonably pleased with the key proposals announced in Mr Osborne’s Autumn Statement. As the UK is still grappling with unparalleled debt and the ripples of the Eurozone crisis, they could not really expect any large tax hand-outs.
Following the Autumn Statement, the owner managers’ tax landscape looks relatively unchanged and, more importantly, relatively unscathed. They are still able to extract dividends from their companies at modest tax rates (with a maximum effective rate of 30.6% from 6 April 2013) and spousal dividend planning remains robust. Companies continue to provide effective tax shelters for ‘surplus profits’, enabling those profits to be retained at low corporate tax rates.
In recent years, there has been considerable debate about the use of aggressive partnership structures and the possible legislative weapons that HMRC could use to nullify their effectiveness. Businesses that have opted to use these structures are likely to be concerned about the proposals for a detailed HMRC study in this area. Thankfully, the Government has opted not to introduce yet more complex legislation to tackle personal service companies, although companies vulnerable to IR35 challenges should be prepared for more vigorous HMRC policing in this area.
For larger owner managed companies, business, the planned reduction in the main corporation tax rate to 21% from April 2014 will also be welcomed. Many will ponder whether this will ultimately lead to a single corporation tax rate (and the chance to get rid of ‘associated companies’ (!)). Or will the chancellor be looking to retain a commensurately lower tax rate for ‘smaller’ companies?
Probably the most welcome proposal is the ten-fold increase in the Annual Investment Allowance (AIA) from the current £25,000 to £250,000 from 1 January 2013. This effectively reverses the reduction in AIA to £25,000 that only came in from April 2012 so there are likely to be complications for accounting periods straddling the changeover date. The new £250,000 AIA limit is scheduled to last for a two year period, but will give many owner managed businesses an immediate tax write off on all or most of their capital expenditure. Businesses planning to incur significant capital spending should now wait until the new year.
Pension funds have always been an easy target for tax raids but, in my view, the reduction in the annual allowance to £40,000 and lower lifetime cap from 2014/15 is likely to affect relatively few owner managers. Anecdotal evidence suggests that most of them gave up on traditional forms of pension provision some time ago, preferring to control their own ‘pension’ pot by investing funds through personal investment companies or suitable property investment. A properly structured family investment company still remains a pretty effective vehicle for retaining and controlling wealth.
Many will be dismayed to learn that the Government intends to push ahead with its controversial and impractical proposals to allow shares to be issued to employees in exchange for giving up many of their employment rights. But at least, we now have an announcement that the beneficial rule enabling entrepreneurs’ relief (ER) to be claimed on all post-5 April 2012 EMI options (irrespective of size) will be revised. Thus, for EMI options granted after 5 April 2012, the relevant 12 month holding period for ER will run from the date the option is granted (as opposed to the date when the option is exercised, as was originally proposed). This will enable the benefit of the 10% ER CGT rate to be available for the vast majority of exit-based EMI option schemes.
The owner managed business sector will be thankful that it has avoided the spotlight, which has been reserved for large multinational groups. Following intense media coverage about tax avoidance by a number of multinationals, this sector is likely to bear the brunt of HMRC scrutiny. The Treasury clearly believes there are substantial tax revenues waiting to be collected in this area.