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Readers' forum - Efficient extraction

17 November 2005
Issue: 4034 / Categories:

With the advent of the legislation relating to post-acquisition benefits on employment-related securities in Finance Act (No 2) 2005, it would appear that this potentially also affects the owner-managers of small companies who are currently extracting profits by way of low salary and then dividends, and could indeed lead to a double tax charge.

With the advent of the legislation relating to post-acquisition benefits on employment-related securities in Finance Act (No 2) 2005, it would appear that this potentially also affects the owner-managers of small companies who are currently extracting profits by way of low salary and then dividends, and could indeed lead to a double tax charge.
I have not seen a great deal of debate about this in the technical press and I have been on courses recently where the low salary plus dividend route is still advocated. I am curious as to whether readers are now advising their clients to start drawing a market salary as a return for services, so that the dividend represents a return on equity.
Query T16,712                                                — DMC.


Reply by Loads of Blarney:

It is indeed curious. Since the anti-avoidance rules were introduced in F(No 2)A 2005 all seems to have gone very quiet. This is surprising since the rules have effect on or after 2 December 2004. According to the Paymaster General, 'The purpose test … has been carefully designed to target complex, contrived avoidance arrangements that are used mainly to disguise cash
bonuses …, it will be absolutely clear from what I say about the purpose test that this measure will not affect the taxation of those small businesses that do not use contrived schemes to disguise remuneration to avoid tax and National Insurance'. So it would seem that the typical owner-managed business is safe — or is it? The full text of the legislation is in ITEPA 2003, ss 447

Issue: 4034 / Categories:
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