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Budget 2010 - a new approach to close company apportionments?

As Budget Day approaches, there has been speculation that the Chancellor is thinking about reintroducing some form of apportionment for close companies. In my opinion, an additional charge on dividends and other sources of investment income would be a much more effective way of dissuading owner managers from their present low salary high dividend regime.

In 1989, the then Conservative Government under Margaret Thatcher abolished the so-called close company apportionment rules which had been around since the 1920s. These provisions were intended to ensure that, where the directors of a successful family company decided not to distribute a substantial part of their post-tax trading and investment profits, they were deemed to have done so, subject to the retention of a reasonable sum for the working capital requirements of the business.

Given that the Chancellor of the Exchequer, Nigel Lawson, had recently harmonised income tax and capital gains tax rates at a maximum of 40%, it was considered that a measure designed to ensure that taxpayers should not benefit from a lower (or nil) rate on capital gains when the money could have been distributed as more highly taxed income in the form of a salary or dividend was now redundant.

In recent months, there have been rumours emanating from the Treasury that the present Chancellor is considering the possibility of re-enacting this former legislation. Presumably, the thinking is that, with effect from 6 April 2010, a high income individual will be taxed at up to 50% on his salary or 36.1% on his dividends, but that he only faces a capital gains tax charge of 18% (or sometimes 10%) on the disposal of his shares. Although it seems almost certain that capital gains tax rates will have to rise in the next year because of the gap between the top income tax and capital gains tax rates, the Government would probably wish to retain the present modest charge for those who qualify for entrepreneurs’ relief.

Accordingly, a tax scenario which encourages the retention of profits in owner-managed businesses – which is presently the case – is likely to be stopped. And one way of doing this might be to introduce a Mark II version of the close company apportionment regime.

Another consideration is that, with the impending introduction of higher rates of income tax, many existing unincorporated businesses will be turning themselves into limited companies in order to try and shelter profits at lower rates of tax than would be possible had they remained sole traders or partnerships. In other words, there will be a rush to incorporate not dissimilar to that which occurred in the early 2000s so that taxpayers can enjoy the advantage of extracting business profits via dividends more tax-efficiently than would otherwise be possible.

My own view is that the reinstatement of an apportionment procedure for close companies would have little or no effect on this latter situation other than perhaps forcing some business owners to distribute more profits than they were otherwise minded to do. Nor would it deal satisfactorily with the problem of the disparity between income tax and capital gains tax rates.

Although I do not personally like the idea (nor would many of my clients!), there is no doubt in my own mind that the most effective approach to discouraging owner-managed companies from pursuing the low salary high dividend routine which has been widely practised in the past is to introduce an additional levy on dividends and other forms of unearned income similar to the investment income surcharge which was abolished by the Finance Act 1984. A charge of, say, 15% on investment incomes above a specified threshold would almost certainly put a stop to tax planning of this sort.

This year's budget will be held on 24 March 2010. Commentary from Robert Jamieson, partner with Mercer & Hole and past President of the Chartered Institute of Taxation.

The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Robert you can contact him at or call 020 7353 1597.

We will be blogging on Tax Plus Blog andSME Plus Blog on Budget day. If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.



Date: 10th March, 2010
Author: Robert Jamieson


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