Re-defining the Taxation of Dividends

Post April 2016 Planning

As a result of the changes announced in the budget, tax planning involving dividends will become less attractive, and we are likely to see a move towards paying salary rather than dividends …. provided the ‘wholly and exclusively’ test can be met of course.

Pensions and ISAs will be unaffected, and the impact on trusts is thought to be broadly neutral as regards net income available to beneficiaries. The reality is however that there appears to be no mention of how this new system will apply to trustees. The worst case scenario is that a rate of 38.1% will apply to all dividends received by discretionary trusts (following the alignment of the trust rate with the individual additional rate). Presumably, the tax paid, at whatever rate, will go into the tax pool and become potentially repayable, thus changing the issues of a mismatch of tax rates in the tax pool.

Pre April 2016 Planning

It remains open for significant dividends to be accelerated before 5th April 2016 with the funds being taken to the directors loan account for future extraction.

Although there is no further information available at this point it is likely that dividends will remain non-deductible for corporation tax purposes.

Annual Investment Allowance

Businesses looking to invest in a significant amount of qualifying plant and machinery in the coming year may wish to accelerate this spend so that it falls with the higher threshold of £500,000 where appropriate, applicable up to 31 December 2015. 

Care will need to be taken with respect to expenditure incurred within the chargeable period straddling the change in allowances in order to maximise availability of the allowance.

Amortisation of Goodwill

The latest provisions seem to almost put companies back to the position they were in prior to the introduction of the intangibles rules in 2002, although indexation is not available when goodwill is disposed of at a profit.

As a result, companies may have three types of goodwill on their balance sheet: pre-2002 goodwill that is dealt with under capital gains tax principles; goodwill acquired before 8 July 2015 in respect of which amortisation can be deducted for corporation tax purposes; and “new” goodwill which is dealt with under the intangibles rules but for which amortisation is not deductible for corporation tax purposes. Hardly tax simplification.

A corporation tax deduction will continue to be available for amortisation on other types of intangible asset.