10% Tax

[hugebrain]

The powers that be are trying to soften us up for more tax increases and have planted a bunch of stories in the press about private equity paying only 10% tax. One of the stories said the 10% actually there to encourage small companies and entrepreneurs.

So, how do we get a piece of this before they abolish it?

[Lewis]

The powers that be are trying to soften us up for more tax increases and have planted a bunch of stories in the press about private equity paying only 10% tax. One of the stories said the 10% actually there to encourage small companies and entrepreneurs.

So, how do we get a piece of this before they abolish it?

I think you will have to invest in some "high risk" shares/investments (they have a special name, can't remember) and then you can pay only 10% tax on profits.

[TheFaQQer]

Seems to be that you invest in a company and when you sell it, you pay capital gains tax. In the meantime, you take no income and no dividend from the company.

[VectraMan]

I thought this was for companies that were already in trouble. So the private equity firms buy up the company, make it profitable with ruthless efficiency (i.e. mass redundancies), then sell it at a profit and pay less tax on that profit for their trouble.

Which depending on your politics is either a shining example of capitalism working for the benefit of us all, or a shameless exploitation of the working classes.

[hugebrain]

Seems to be that you invest in a company and when you sell it, you pay capital gains tax. In the meantime, you take no income and no dividend from the company.

So, is there a company that will buy up IT contractor's companies for just a bit less than the cash balances in their company accounts? I suppose should sell mine whenever a contract ends.

Doesn't seem like 10% tax though. Seems a lot like 20% corporation tax + 10% capital gains = 30%.

Slightly better than the 35% or whatever it is that we pay now, but not too exciting. Is the 10% a big lie, or do they get the corporation tax back somehow - maybe by borrowing money and offsetting the interest against profits?

[IR35 Avoider]

The powers that be are trying to soften us up for more tax increases and have planted a bunch of stories in the press about private equity paying only 10% tax. One of the stories said the 10% actually there to encourage small companies and entrepreneurs.

So, how do we get a piece of this before they abolish it?

The 10% is the capital gains tax due on a gain from a business asset that has been held for two years or more. You can take advantage by retaining money in your company and winding up you company every two years. In practise this will mean a total of about 30% tax as your company has to pay Corporation tax on the same money, therefore it is better to distrubute the money as dividends that fall in your basic rate bands in years where you have some portion of your band not taken up by other income. In that case you will have no extra tax to pay, and the only tax will be the Corporation tax already paid.

[contractor58]

Any advice on what I should do?

I started up a limited company about 6 months ago with a plan to winding it up about 2 or 3 years later to take advantage of taper relief. This was a 'plan' heavily promoted by SJD. At the time SJD said 'they know of no reason why the taper relief should be removed', now they are saying they 'always wondered how long it would last'.

It seems firms like Grant Thornton are already offering clients advice over this (see link below), but SJD despite heaving pushing the use of this aren't offerning any advice at the moment.

http://www.shout99.com/contractors/s...le.pl?id=44222

[mjshrimpton]

At the time SJD said 'they know of no reason why the taper relief should be removed', now they are saying they 'always wondered how long it would last'.

The two positions are not mutually exclusive.

[minstrel]

Any advice on what I should do?

I started up a limited company about 6 months ago with a plan to winding it up about 2 or 3 years later to take advantage of taper relief. This was a 'plan' heavily promoted by SJD. At the time SJD said 'they know of no reason why the taper relief should be removed', now they are saying they 'always wondered how long it would last'.

It seems firms like Grant Thornton are already offering clients advice over this (see link below), but SJD despite heaving pushing the use of this aren't offerning any advice at the moment.

http://www.shout99.com/contractors/s...le.pl?id=44222

I spoke to SJD about this almost a year ago, and even then they were telling me that they thought it would be a loop hole that would be closed sooner or later.

As to what I would do in your situation, I would sit tight if I were you.

If you are following the SJD 'plan' then you are probably paying dividends up to Higher Rate threshold and keeping the rest in the company to make as a capital distribution when you wind up.

Your only other option would be to draw more dividends and get stung for higher rate tax.

If the legislation is changed then your worst case scenario would be that you simply draw money out via dividends next year rather than taking it this year.

Best case is that they spend 18 months deciding what to do and you manage to wind up your company before the legislation changes.

Even if they make changes to the taper relief, it might still be worthwhile. For example, they could change the period of time to 4 years before qualifying for 75% taper relief, or they might just change maximum percentage to 50%. Who knows. Some clever accountant might even come up with another legitimate 'plan' that allows you to minimise tax.

What is certain is that if you draw everything out via dividends and pay the higher rate tax now, you'll never get it back. If you sit tight other options might emerge.

Having said that, it might also be worth taking a call in 6 months time after you've had the company for 1 full year. Although the taper reief is not the full 75% (can't remember how much it is after 1 year), if the concessesion looks likely to be withdrawn in the 08/09 tax year, it could be worth winding up the company after a year.

I'm sure SJD will offer advice soon, but they probably won't be able to say anything hugely different to what I have said. No one can say with any real certainty what the tax rules are going to be in 2 or 3 years time.

[Ardesco]

No one can say with any real certainty what the tax rules are going to be in 2 or 3 years time.

I disagree. I can say with absolute certaintly that our glorious new leader will do all he can to fudge the laws so that we have to hand over more of our hard earned money in the next 2-3 years while making the great unwashed think that tax has gone down by cutting the base rate by 0.25% and bringing in a swath of new stelth taxes.

After all it's only fair........