Business Finance: Things to do before the General Election

Peter Harrup of BDO.

Peter Harrup of BDO. - Credit: Archant

There is no escaping the forthcoming General Election and the manifesto pledges that are emerging thick and fast.

Although the outcome is uncertain, we can be reasonably sure that any tax changes after the election are highly unlikely to be applied retrospectively. Therefore, there are some actions that businesses should now be considering to manage their potential future tax exposure.

If you extract profits from a company you control by way of dividend in 2014/15, you can be sure that the maximum effective rate of tax you will pay on the dividend is 30.56%. If the additional rate of tax goes up to 50% after the election, the maximum effective rate of tax on dividends would rise to 36.11%. Interestingly, the party proposing a return to the 50% rate is also proposing tax breaks on dividends for long term investors so, in the fullness of time, the rate of tax on dividends for some company owners could go down.

Should you rush to invest in new machinery now or wait? The main political parties are not promising major changes to corporation tax rates and significant changes to current capital allowances are unlikely. However, the annual investment allowance is due to fall from £500,000 to £25,000 on January 1 2016, so planning to make the most of it this year might be wise.

Pledges to refocus entrepreneurs’ relief from capital gains tax (CGT) on longer term owners may be a concern to some, as will other pledges to increase the rate of CGT. Rushing to sell your business may not be wise but, if you are planning to pass your business on to the next generation, a partial disposal now may be appropriate to bank valuable tax reliefs.

The employee shareholder status scheme has proved attractive to many businesses as a way to motivate employees tax-efficiently. As two parties have stated their intention to close the scheme, it may be worth starting one now and issuing shares to lock in the benefits.

Maximising pension contributions for 2014/15 and 2015/16 before May 7 could also prove to be a wise move with many predicting that, whoever wins, higher rate tax relief on contributions will be removed to help cut the deficit.

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The key advantage of acting now is that you will have certainty on the tax implications and costs, whereas if action is delayed, tax rules could be different by the time you act. But be careful not to rush into something that triggers additional costs where the benefit is not guaranteed.

: : Peter Harrup is a partner specialising in tax at the Ipswich office of BDO LLP.