Small businesses braced for dividend tax rise

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Owner-managed small businesses are set to be hardest hit in this week's Budget, but larger companies should also brace themselves for lashings of new red tape from the Government.

Most owners of small businesses take their salary as a dividend payment, which escapes National Insurance Contributions (NICs). But in his pre-Budget report, the Chancellor said he would make owner-managers pay "the right amount" of tax on dividends. Most experts believe this will mean NICs will be slapped on dividend payments.

Adam Frais of BDO Stoy Hayward said: "The Government wanted to encourage businesses to incorporate and introduced a zero rate of corporate tax in 2002 for small companies. This has led to a huge increase in incorporations. But there is now a disincentive to set up your own business, which cannot be good for the entrepreneurial culture of Britain's economy."

Ernst & Young is also concerned about the impact of the proposals. Anne Redston, an Ernst & Young partner, said: "The Government has also refused to consult on the measures and there is a serious risk that the new rules will be poorly targeted, so they catch more people than is intended."

Large companies will have increased administrative burdens from changes to transfer pricing rules that are set to be confirmed in the Budget. Companies that sell their goods to other companies in the UK will now have to justify the price of their goods to the Inland Revenue - at present a requirement only on sales to foreign businesses. Clare Hartnell at Grant Thornton said: "The only reason for this is to protect UK businesses from the threat of litigation from European counterparts, who could claim discrimination." She said it would create a substantial red-tape burden on UK businesses for very little benefit.

Anti-avoidance measures are at the top of the Government's agenda and it has already flagged a planned clampdown on inheritance tax dodges. Many parents who give their houses to their children but continue living in them are likely to be hit with an income tax bill.

There are also fears that the Chancellor will increase stamp duty as the housing market has remained buoyant. He may look at introducing new bands of stamp duty at the higher end of the market.

One wild card could be a rise in VAT rates. "The consumer-driven end of the economy has held up well and it would be one area that Gordon Brown could raise taxes," Mr Frais said. "The electorate would blame the shop for raising its prices and not the Government. This would not be good news for retailers, however."