Tax & admin 1 December 2015

Why the new dividends tax could be the final straw for struggling business owners

Small businesses could be penalised for chasing profits
Small businesses could be penalised for chasing profits

It’s not often that you will hear an insolvency practitioner (IP) objecting to a piece of new legislation which in all likelihood would bring-in more work once enacted.

Recently, however, I have found myself doing just that. The piece of legislation in question is the forthcoming dividends tax. For anyone who is not aware of this new tax, from April 2016, dividends taken by business owners will be taxed at an extra 7.5 per cent (although the first £5,000 will be tax free). The profits, from which a dividend is taken, will already have been taxed at the standard rate of 20 per cent up to the higher earners threshold.

I have been following with interest the “Survive & Succeed” campaign run by Serena Humphrey from The F Word Training in Nottingham.Humphrey points out that this tax will represent an extra burden on the owners of small and medium-sized businesses, which are already facing the onset of auto-enrolment, the new Living Wage and increases in insurance premium tax, in a market place that is still reeling from the effects of a lengthy recession.

As an IP, I can see that the additional financial pressure of this dividends tax on businesses which may be struggling to survive, could well represent the final straw. I have witnessed several businesses which have survived the worst of the economic downturn, deciding to call it a day because it is no longer possible to carry on the fight. For a few years now, we have spoken of the so-called “zombie businesses”, those businesses that have survived mainly as a result of creditor leniency and low interest rates. It has been recognised that this survival has been relatively easily upset by a simple occurrence, such as a large bad debt, creating an insurmountable hiatus in cash-flow. Everyone in the profession has been watching for an increase in interest rates, which it is felt could open the flood gates of insolvency in respect of these zombies.

So, one may think that anything which could help tip the balance would be a good thing as far as the insolvency profession is concerned? After all, the number of business failures, with the obvious exception of the few large headline insolvencies, has been at a very low level for what feels like a very long time.

Well yes, whilst this is undeniably true, I have had to remind myself that I too am a small business owner, which presents me with an interesting conflict of interest. In common with most SMEs, I too practice through a limited company and pay myself by dividend. Profit is, after all the reward for risk and the perk, if perk it is, of a lower tax rate on dividends has always been recognition of that. It is not, as the chancellor has said, a tax avoidance device, it is rather an incentive for those small businesses which form the backbone of this country.

IP’s have always preferred it when the economy is in growth, we can sell assets and banks are more inclined to lend. There will always be business failures through mis-management, bad luck and sometimes sheer villainy, but when the economy is on the upturn, it is often success that brings about financial problems through over trading and shortage of cash. IP’s have an armoury full of powerful weapons and we can make use of these to try to save businesses in these circumstances and we’d always rather earn our crust through rescue than through burial.

What concerns me about the dividends tax is that it will only serve to undermine small businesses and dis-incentivise owners. Many may simply prefer to close-up shop rather than continue to trade on with reduced prospect of financial reward.

Returning to Humphrey’s “Survive & Succeed” campaign, rather than rubbing my hands with glee at the prospect of new work coming in because business owners have had enough of working hard to stand still, I feel strongly enough to join in and campaign against what is seen by many as a tax too far. There is a current petition running to lobby the powers that be. If you want the government to sit-up and take notice, then please sign the petition and let others know about it too.

The festive season will soon be upon us and although conflicts of interest are always a thorny subject with IPs, this is one turkey who may be seen to be voting for Christmas.

John Harlow is the founder of Harlow Insolvency & Corporate Recovery.

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