In the UK, distributions in the form of remuneration or dividends are subject to personal income tax, while capital distributions such as the repayment of share capital or a distribution made in a winding-up are usually subject to capital gains tax. The government is concerned that companies - in particular small close companies - are paying income distributions in the form of capital distributions, in order to benefit from the lower rates of capital gains tax. The changes to the company distributions rules as part of Finance Bill 2016 are designed to discourage this.
ACCA understands the rationale for the proposed changes to company distribution rules.
We agree that the ability to obtain tax advantages by extracting value from companies in the form of capital, rather than income distribution, can distort decision-making, and we agree that this is undesirable from an economic perspective.
While there is a need for the differing treatments, they should be available only where appropriate.
However, the changes proposed under Finance Bill 2016 could have undesirable consequences on entrepreneurial companies, leading to potentially negative impacts on the UK economy as a whole.
We would urge the government to bear in mind that sound planning for tax is essential to operating and growing viable businesses. Any anti-avoidance legislation should therefore be balanced against the need to encourage the creation and continued operation of such businesses.
Finally, we would suggest a review and reconsideration of clause 17 of Finance Bill 2016, in relation to the counteraction process.
We believe the changes could result in taxpayers being disproportionately penalised where counteraction procedures are unjustified.