Contract lawyer (UK) Roger Sinclair Egos Ltd

The Egos position on IR 5-91

IR 5.91 - updated post-Budget 17th March 2004

The proposed implementation of IR 5.91 has now been disclosed. It is intended that profits distributed to non-company shareholders are charged at a minimum rate of 19%. The new rules will apply to distributions made after 1-4-04. See PN05 & BN34. Update: see also IR Q&A 25th March 2004

This will affect companies declaring dividends, where the taxable profits are less than ₤50k. The company will pay the additional tax.

Because the company is likely to be bearing the tax, it is likely to also affect offshore non-corporate shareholders.

This will also affect trusts where the trustees are individuals, but not where there are corporate trustees.

Distributions are deemed made from current year's profits, and so if those profits are less than ₤50k, the charge will apply, regardless of any retained profits from previous years.

There are rules to cover situations where distributions made exceed profits for the relevant accounting period; where the company is a member of a group, the excess will be passed to other companies in the group that can absorb the excess; any remaining surplus of distributions over profits is carried forwards and not back.

The effect is on the taxation of current and future profits, regardless of when the retained surplus was actually earned.

Conclusion: A company carrying undistributed retained profits forwards now pays more CT following distribution of those profits, either in the year of distribution, or in a later year (depends on (a) whether profit for the year exceeds ₤50k, and on (b) whether dividends for the year exceed profits for the year). Where profits are retained and not paid out in the year in which they arise, there will be additional CT payable in any later year in which those profits are distributed if the profits for that year are between ₤0 and ₤50k.

It appears that contrary to the Government's stated pious intentions of encouraging retention of profits for growth, this is a hidden 'gotcha', and the wiser dividend policy is, subject of course to the impact of higher rate tax, in years where profits exceed ₤50k, to distribute all current year profits as dividend, since retaining them will mean more CT is payable at some point, unless they are retained until closure of the company.

Will IR35 remain in place?

A review has been declared of the ‘issues raised by the interaction with the tax system of definitions of income of self-employment, and the remuneration paid to owner-managers, in a discussion paper which will be issued at the time of the 2004 Pre-Budget Report’. This discussion paper has indeed been issued - changes are in the wind.

Extracting profits

Many are looking at closing down their companies in order to extract retained profits, and starting afresh with new companies - there are a variety of reasons why the wise contractor changes company from time to time, and it may be wise to consider doing so. Others are looking at taking steps to extract profits into a safer environment now, without effecting a closedown. I don't criticise either approach.

For more information on extracting profits, whether or not accompanied by a closedown, click here.

[mail to Egos Ltd] [Egos Ltd 'Welcome' page]

If you're another lawyer or an accountant reading these pages, I'd be happy to discuss any points arising with you - particularly if you'd like to debate any points where you disagree with my views - mail me!

This page was last updated on 17th January 2005.

No liability is accepted for any inaccuracy in the information in these pages - see full disclaimer

Disclaimer of liability:

The information on these pages is provided free and for information only, and is provided 'as is'. Whilst believed to be correct, it is in no way comprehensive. It is provided for your interest only and is not intended to be relied on as formal legal advice. The posting of information on these pages is not intended to create a lawyer-client relationship, and you should not act or rely on this information without seeking professional advice. No liability is accepted therefore for any errors, or for any losses that may be incurred if it is relied on.

[Return to Top]

Copyright details:

You may read these pages on-line, and download them to read later, for your own personal use.
This copyright notice must appear on every page that you print from here.
You must not redistribute these pages or any part of them in any form or medium without first obtaining my consent.
You are welcome to set up links to this website from others.

[Return to Top]

[Return to 'Welcome' page]