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Spring 2004 Bulletin

2004  BUDGET

We had expected that the Chancellor would use the Budget to announce his plans for taxing small companies.  In the event, he did restrict the nil rate band of corporation tax, but deferred any decision on the taxation of dividends until next year and, in an unexpected move, hinted at a fundamental shift in the line between employment and self employment, which would have the effect of bringing more small companies within the IR35 net. Taking each of these points in turn:

o       In 2002 the Chancellor introduced a nil rate band of corporation tax for companies with annual profits up to £10,000.  He has, apparently, been surprised to find that many small company proprietors have chosen to take their profits as a dividend which, unless they were higher-rate taxpayers, was completely tax free.  This, he considers, is taking unfair advantage of his original generosity and so, from 1 April 2004, profits distributed as dividends will be subject to a minimum rate of corporation tax of 19 per cent.

o       Last December the Chancellor revealed he was in any case unhappy that, by taking dividends instead of salary, the shareholder-directors of small companies can avoid the National Insurance contributions usually payable on earnings.  He promised to ‘bring forward specific proposals for action in Budget 2004’ but in the event, only announced that ‘a discussion paper’ will be published in the late Autumn.  Every expert is trying to guess what this paper will say, but in reality we are all working in the dark, as no-one really knows what the rules will be this time next year.

o       Shortly after Budget Day the Inland Revenue proposed that all labour-only sub-contractors in the construction industry should be treated, for tax and National Insurance purposes, as if they were employees.  This proposal has not yet been formally adopted, but it seems likely that it will come into force to coincide with the introduction of a revised Inland Revenue Construction Industry Scheme in April 2006.  Once the principle is accepted for the construction industry, it could logically be extended to other sectors, such as ‘knowledge workers’.

o       IR35 bites where the worker would be an employee of the ultimate client if there was a direct contract between them.  If all labour – or services-only subcontractors are treated as employees, it would be far easier for the Revenue to show a ‘deemed employment’ nexus between the worker and the ultimate client.

50 per cent capital allowances in 2004/05

There was however some hard news in the Budget – and some of it was even welcome.  First, the Chancellor announced that small businesses will be able to claim a 50 per cent capital allowance for their purchases of plant and machinery in the year beginning 6 April 2004 (1 April 2004 for companies).  This means that half the cost can be deducted from taxable profits in the year of purchase.

The definition of a ‘small’ business for this purpose is in fact very generous: the business must satisfy at least two of the following three tests: annual turnover not exceeding £5.6 million; balance sheet total not exceeding £2.8 million; payroll not exceeding 50 employees.

Employers will no longer pay Tax Credits

Another welcome announcement was that payment of Working Tax Credit by employers will be phased out: many employers have complained that Tax Credits complicate their payroll administration and can cause cash-flow problems.  However, it is not yet known when phasing-out will start – October 2004 seems the earliest possible date, with April 2005 more likely – nor how long the changeover period will be.

Employees allowed to use company vans

Here there is some good news and some bad news. The good news is that, from 6 April 2005, there will be no benefit-in-kind charge where an employee is allowed to use a company-owned van for home-to-work travel provided he is required to take the van home (for example, because he is on call overnight, or because he will go direct to his first job the next day) and private use is expressly restricted to home-to-work journeys.

The bad news is that, where private use is not restricted to home-to-work journeys, from 6 April 2007 the benefit-in-kind charge will increase from the present £500 (£350 for older vehicles) to £3,000 with an additional £500 if the company does not charge for the fuel used.

In many cases, therefore employees will want their employers to restrict private use to home-to-business journeys especially once the increased tax charge comes into force in 2007.  Employers should, therefore, be reconsidering their company van policies.

National Minimum Wage

The Department of Trade and Industry has confirmed that, from1 October 2004, the National Minimum Wage will rise from £4.50 to £4.85 an hour.  The Development Rate (payable to 18 to 21 year olds and to some new employees undergoing formal training) will rise from £3.80 to £4.10.

The Department has also announced that for the first time, there will be a minimum wage for 16 and 17 years olds; it will be £3 an hour.  This will not, however, apply to apprentices, for whom the rule will remain that they are not entitled to the minimum wage until they have completed their first year’s apprenticeship and are aged 19 or more.

Wages paid to family members

A final point to remember is that the minimum wage which will frank an employee’s National Insurance record for pension and benefit purposes rises to £79 a week (£343 a month) for the 2004/05 tax year.  This is well worth remembering if you have family members working in your business, perhaps on a part-time basis.