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TaxationWeb by Mark McLaughlin ATII TEP

Tax planning opportunities for family companies are abound following Budget 2002. Mark McLaughlin, Associate with Tax Specialists Forbes Dawson considers some of the options available.The corporation tax rate reductions for small companies announced in Budget 2002 will be a welcome change for many family companies.

The introduction of a “zero” starting rate of corporation tax from 1 April 2002, together with a reduction in the small companies rate from 20% to 19% has further widened the gap between corporation tax rates for most family companies, compared with the 40% tax rate suffered by unincorporated business owners who are higher rate tax payers. This makes business incorporation an increasingly attractive proposition (see our article on this subject).

Company Tax Rates

The tax rates applicable to companies from 1 April 2002 are as follows:

Taxable Profits - Rate

First £10,000 = 0%
Next £40,000 = 23.75%
Next £250,000 = 19%
Next £1,200,000 = 32.75%
Over £1,500,000 = 30%

The 23.75% rate is the ‘starting marginal rate’ and the 32.75% rate is the ‘small companies’ marginal rate’.

Tax Planning

Tax planning for family companies has traditionally involved ensuring that profits fall outside marginal rates (from 1 April 2002 these are 23.75% for starting rate purposes and 32.75% for small companies relief purposes), and into the zero or 19% rates. Popular strategies include advancing company expenditure and deferring income, together with pension contributions during the accounting period and the voting of bonuses up to 9 months following the end of that period.

However, further planning opportunities are also available, including the following:

1. The use of “50-50” companies i.e. connected companies which are not “associated” by common control for the purposes of dividing the upper and lower profit limits for starting or small company relief purposes. Such companies can each benefit from unrestricted lower and upper profit limits.

2. The use of a service company in the context of an unincorporated business. With planning, it is possible to shelter profits at the zero or small companies tax rate, without falling foul of the “IR35” rules for personal service companies.

3. Alternatively, a company can be introduced as a partner in the business. A corporate partner is particularly beneficial if the business owners are paying higher rate tax on profits, where the majority of those profits could otherwise be retained within the company at lower tax rates.

Further Information

For further details of planning opportunities for small and medium size businesses, please call Mark McLaughlin, Associate with Tax Specialists, Forbes Dawson on 0161 245 1090 or by email at mark@forbesdawson.co.uk