International Accounting Standards
Dividends and Corporation Tax Rates
Not so topical, ongoing technical issues
The Companies Act 1985 has been revised and rewritten, and published as The Companies Act 2006. This will come into effect over the next year or so, gradually replacing the previous Act.
The new Companies Act has been drafted differently from those in the past. The 1985 Act presented us with a list of requirements that all companies had to comply with unless they were covered by one of the many exemptions listed later in the Act. The 2006 Act starts by listing those requirements for small companies, and then adds extra requirements for larger companies.
Perhaps one of the most important changes for small companies is the reduction in the time give to file accounts at Companies House. This is reducing from 10 months to 9, and so lines up with the Corporation tax payment deadline.
Click here to download The Companies Act 2006 or click here for the DTI's explanatory notes.
The House of Lords pronounced on a very high profile case (Arctic Systems) on 25 July 2007 regarding the treatment of income in husband and wife companies. In a number of these businesses HM Revenue and Customs have sought to treat the wife's income as if it had been paid to her husband, thereby increasing the couple's overall tax liability.
In their unanimous judgement the Lords decided that the interpretation of the law being used by HM Revenue and Customs is incorrect. The Lords agreed with HM Revenue and Customs that by setting up a company with one share each the husband and wife were entering into a settlement arrangement, but they also said that the exemption for gifts between spouses applied, so dividends paid to the non working spouse were not income arising under a settlement.
The Treasury issued a written Ministerial Statement the day the judgement was issued stating that they intend to change the legislation as a result.
In his budget speech on 12 March 2008 Alastair Darling announced that the proposed changes to the law dealing with 'income shifting' would be delayed until 2009.
Until recently, UK Accounting Standards have been set by the Accounting Standards Board, and before that by the Accounting Standards Committee. A European Union directive requires all listed companies (those quoted on a stock exchange) to prepare their accounts from 2005 onwards in accordance with International Accounting Standards, which are set by the International Accounting Standards Board.
The UK Accounting Standards Board has undertaken a review of all UK accounting standards to ensure that companies complying with UK standards will also be complying with International Accounting Standards.
Unlisted companies (those not quoted on a stock exchange) also have to comply with accounting standards and are therefore potentially affected. However, the vast majority of small companies are unlikely to be affected as the changes are mostly related to large company issues.
Over the years debate has raged in the accountancy profession and elsewhere over this subject. Should goodwill be amortised (depreciated)? Accounting standards have been written, amended, rewritten and replaced by new standards. For first few years of the 21st century purchased goodwill has been included in the balance sheet and (generally) amortised in accordance with Financial Reporting Standard No 10 (FRS 10), whereas internally generated goodwill has not been shown on the balance sheet.
This situation is once again under review. The Accounting Standards Board have issued Financial Reporting Exposure Drafts Nos 37 and 38 which discuss intangible assets and goodwill, together with how to treat the impairment of those assets, and these are closely based on International Accounting Standards Nos 36 and 38. It seems likely that goodwill will not be amortised following a mathematical formula any longer, but that it will be included in the balance sheet at its current value.
The budget of March 2007 confirmed that the deadline for filing paper self assessment tax returns will change from 31 January to 31 October. The change takes effect for 2007/08 tax returns which will have to be filed by 31 October 2008. The deadline for returns filed electronically is not affected and remains 31 January.
There are two very different regimes for Corporation Tax. Companies with profits of less than £300,000 are taxed at the small companies rate(s). Those with profits exceeding £1½ million are taxed at the full rate. Those with profits in between are taxed on a sliding scale.
In the 2007 budget the government announced a 2p reduction in Corporation Tax rates. This was misleading as the rates for small companies was increased from 19p to 22p. Despite the government's trumpeting of its support for SMEs (Small and Medium Sized Enterprises) the reality is rather different.
Prior to 1 April 2004 companies with taxable profits of less than £50,000 paid Corporation Tax at a rate of less than 19%, with a 0% band for companies who's taxable profits were less than £10,000.
In his 2004 budget The Chanceller of the Exchequer introduced measures to ensure that from 1 April 2004 the profits from which dividends are paid are taxed at a minimum of 19%.
On 1 April 2006 these April 2004 measures were scrapped, but the lower Corporation Tax rates disappeared, leaving the lowest rate at 19%.
The March 2007 budget increased the Corporation Tax Rate for small businesses from 19% to 20% from April 2007. This has further increased in April 2008 to 21%, and it will increase to 22% on 1 April 2009.
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