Chancellor plans 'tax grab' warns PwC

Chancellor Gordon Brown is planning a tax assault on the payments small companies make to their owner-directors, according to business advisors PricewaterhouseCoopers (PwC).

PwC said the measures were part of the Pre-Budget Report (PBR) speech to parliament. Mr Brown introduced a range of measures and targeted tax reductions to support small business, showing that the government was concerned that differences in tax treatment between earned income and dividend income should not, "enable reductions by tax planning of individuals’ tax liability.”

The report also said that the government, "will bring forward specific measures in the Budget 2004, to ensure that the right amount of tax is paid by owner managers of small, incorporated businesses on the profits extracted from the company”.

Peter McGuinness from PwC in Belfast says this could herald bad news for owner-managed small businesses in Northern Ireland where these companies are vital to the economy.

There are over 1.2 million small firms in the UK that employ fewer than four people. Over 39,000 of these are in Northern Ireland and comprise nearly 75% of all local VAT-registered businesses.

"Growing numbers of small owner-managed businesses are incorporating, becoming Limited companies, for commercial or tax reasons, often as the result of measures introduced by Gordon Brown himself," Mr McGuinness said.

“The directors of incorporated businesses may also face fewer risks if the company fails. In recent years, even very small companies are incorporating and if the Chancellor targets them for additional tax this will hit Northern Ireland hard.”

Mr McGuinness said that in recent years Mr Brown had removed the smallest incorporated companies from the need to produce accounts, thus making incorporation even more attractive. He also introduced a nil-rate tax band for the first £10,000 of a company’s taxable profits.

But he warned that attacking all owner-managed companies, warns Mr McGuinness would be a drastic over reaction as thousands of businesses could suffer collateral damage from what he described as "friendly fire.”

“If the Chancellor argues that this is intended to counter tax avoidance, the case has not been made - let alone proven. This change will affect husband and wife owned companies- businesses that are at the heart of the UK small firms’ economy that the Chancellor claims to champion. This will hurt Northern Ireland business confidence, investment and profits," he concluded.

(MB)