Help with Corportation Tax [Archive]

macca87

15th February 2009, 12:43

I have to explain several criticisms of Corporation tax that are raised by Richard Murphy. One im having particular problem with is that management and ownership are clearly distinguishable. How does this affect corporation tax?!

I understand that Owners are able to take dividends out of the company which allow for a reduction in tax payment, compared to a salary, but this doesn't really effect a company's corporation tax!

Thanks,
Ross

David Griffiths

15th February 2009, 13:02

Richard Murphy has some very personal views on corporation tax that are probably not in line with the majority of tax practitioners and business owners in the country. Effectively (and I wouldn't want to get involved in a debate) he objects to the use of dividends to reward small company owners and the availability of limited liability status to small businesses. I doubt if 1% of the contributors to this forum have even heard of him, let alone understand or agree with him.

This sounds like a homework assignment. Good luck. ;)

RAL

15th February 2009, 14:04

You right David

I have to admit I have not heard of him.

Jenni384

15th February 2009, 15:07

You right David

I have to admit I have not heard of him.

Me neither :rolleyes:

macca87

15th February 2009, 15:20

Effectively (and I wouldn't want to get involved in a debate) he objects to the use of dividends to reward small company owners and the availability of limited liability status to small businesses.

Even though this article is written by Richard Murphy, imagine it isn't for a second!! I don't understand how management/ownership effects corportation tax. If a company is owned and run by a single person how is this different to a company run with a board of directors and hundreds of employees in terms of corporation tax?

I'm not in this for a debate, i'm only just starting to learn about taxation so am trying to find out from people who understand this field.

Thanks for help!

Jaydee

15th February 2009, 15:40

Me neither :rolleyes:

Me neither - perhaps he is a relative of Eddie though?

David Griffiths

15th February 2009, 15:55

Even though this article is written by Richard Murphy, imagine it isn't for a second!! I don't understand how management/ownership effects corportation tax. If a company is owned and run by a single person how is this different to a company run with a board of directors and hundreds of employees in terms of corporation tax?

I'm not in this for a debate, i'm only just starting to learn about taxation so am trying to find out from people who understand this field.

Thanks for help!

You couldn't possibly read an article written by Richard Murphy and think that it was written by somebody else. You won't learn anything practical about taxation by reading any of his articles, because he gives the impression that he wants all the rules changed so we all pay more tax. He also dismisses almost any opposition to his crusade with terms such as vacuous thinking.

Most of us in accountancy are concerned with the rules and regulations as they are. I don't have the time (or frankly the inclination) to read his stuff.

Jenni384

15th February 2009, 15:57

You couldn't possibly read an article written by Richard Murphy and think that it was written by somebody else. You won't learn anything practical about taxation by reading any of his articles, because he gives the impression that he wants all the rules changed so we all pay more tax. He also dismisses almost any opposition to his crusade with terms such as vacuous thinking.

Most of us in accountancy are concerned with the rules and regulations as they are. I don't have the time (or frankly the inclination) to read his stuff.
Sounds a lot like George Galloway. Don't even get me started on him.... :mad:

Jenni384

15th February 2009, 16:03

I don't understand how management/ownership effects corportation tax. If a company is owned and run by a single person how is this different to a company run with a board of directors and hundreds of employees in terms of corporation tax?

OMBs (Owner Managed Businesses) are usually run like this:
The Director is also the sole shareholder. S/he will take a salary equal to the personal allowance (c. £6k a year). This salary is an an expense against CT. The annual profit is then taxed, and the remainder can be distributed as a dividend. The dividends are effectively tax free in the hands of the shareholder, as long as his total income remains in the basic rate band.
This is a very tax efficient way of running things as you save on Employees and Employers NIC, the former being a reduction in the take-home income of the director, the latter being an extra cost to the business (which does reduce CT, but only by 21% of the NI'er paid).

Contrast this to big businesses: The directors are top employees running the company. They will likely have large salaries and benefits packages. This is an increased expense against CT, but less tax efficient. The director taking the salary will suffer greater deductions from his income.
The directors of these companies will likely hold some shares and thus be entitled to some dividends, but will likely not be the majority shareholders. It's a totally different business structure.

macca87

15th February 2009, 16:04

OK i understand that.. i have to do this, and im stuck! I though that maybe people in the profession, using this forum may be able to help?!

It is in some respects to do with the rules and regulations as i don't understand the viewpoint he is trying to convey. What do the current rules and regulations say about corporation tax and how distinguishable management and ownership are.

I honestly dont understand this article, i know he wants to change corporation tax but still its worth 30% of one of my degree subjects and this is what i HAVE to write about. Im not an advocate, as i say i dont really understand this article, so im trying to understand what is meant by asking professionals!

Thanks,
Ross

macca87

15th February 2009, 16:08

OMBs (Owner Managed Businesses) are usually run like this:
The Director is also the sole shareholder. S/he will take a salary equal to the personal allowance (c. £6k a year). This salary is an an expense against CT. The annual profit is then taxed, and the remainder can be distributed as a dividend. The dividends are effectively tax free in the hands of the shareholder, as long as his total income remains in the basic rate band.
This is a very tax efficient way of running things as you save on Employees and Employers NIC, the former being a reduction in the take-home income of the director, the latter being an extra cost to the business (which does reduce CT, but only by 21% of the NI'er paid).

Contrast this to big businesses: The directors are top employees running the company. They will likely have large salaries and benefits packages. This is an increased expense against CT, but less tax efficient. The director taking the salary will suffer greater deductions from his income.
The directors of these companies will likely hold some shares and thus be entitled to some dividends, but will likely not be the majority shareholders. It's a totally different business structure.

So are OMBs indistiguishable between ownership and managements whereas big business is usually distinguishable?

Am i also correct in saying then that people are more willing to have smaller OMBs rather than big businesses as it can be seen to be more tax efficient?

Thanks,
Ross

Jenni384

15th February 2009, 16:10

Management are supposed to run the business in the best way possible. The business makes profit for the benefit of the shareholders.

I'm really not one for commentary so can't really help you on this, not sure how to relate this to CT. I can comment on how CT works, I do a mean CT calculation (:p!) but I'm not one for writing articles or essays...

Why don't you read some more articles around the subject to get some other people's viewpoints? From what David said about this Murphy chap, he's not very popular so some folk must have made some comments on his opinions somewhere!

Jenni384

15th February 2009, 16:14

So are OMBs indistiguishable between ownership and managements whereas big business is usually distinguishable?

Broadly speaking, yes. Most small Ltd Co's are just one or two folk running their own business. They will be Ltd for the liability aspect, and also for tax reasons - it's often more tax efficient to do the salary/ dividends mix I mentioned, than to be a sole trader/ partnership because of the NI savings.

Am i also correct in saying then that people are more willing to have smaller OMBs rather than big businesses as it can be seen to be more tax efficient?
Not sure about that. Joe Bloggs Plastering Ltd may only wish to stay small. He might not wish to have 250 employees and take over the South West plastering market. That's likely personal preference and also local economy as opposed to taxation that's preventing him from becoming a 'big business'.

However, all big businesses started out small. Some give shares to investors in order to expand... there are so many variables.

David Griffiths

15th February 2009, 16:34

. . . i dont really understand this article, so im trying to understand what is meant by asking professionals!

Thanks,
Ross

But working professionals don't get involved with this kind of hypothesising and policital posturing, so you are in the wrong place I'm afraid. I predicted the low number of people who had heard of Richard Murphy, and that's proven correct as none of the accountants who have come on here so far have heard of him. Add the non accountants to that and you can see what I mean.

You might get help with questions on here about what the rules currently are (but some of us are allergic to doing other people's homework for them) but you don't stand much chance with questions about what somebody thinks that the rules ought to be. Read Murphy's blog (rather you than me) and search for other people's view on the same subject. Not many of us trying to earn a living have the luxury of the time to spend on such matters

macca87

15th February 2009, 16:58

but some of us are allergic to doing other people's homework for them)

Asking about one matter is not the same as asking for you to do the entire 2000 word report. The same as asking my dad for help with management accountancy (which he is involved in) is what im doing now - asking people who know a bit about the subject. I cannot find books, articles etc that relate to this clearly because it is such a radical viewpoitn, but i still thought you guys, who have an interest in the field, might be able to help!

Murphy has had to base his changes on the current system, which HE thinks is flawed. One of these assumptions he has made is that ownership and management are clearly distinguishable, but i don't see how this relates to a firms corporation tax?

If one firm is managed and owned by the same person does the company get taxed differently on the profits compared to a company which is owned by shareholders and run by a board?! Remember this relates to the current system.

Thanks

Jenni384

15th February 2009, 17:02

Asking about one matter is not the same as asking for you to do the entire 2000 word report. The same as asking my dad for help with management accountancy (which he is involved in) is what im doing now - asking people who know a bit about the subject. I cannot find books, articles etc that relate to this clearly because it is such a radical viewpoitn, but i still thought you guys, who have an interest in the field, might be able to help!

If you can phrase your request eloquently (and you did fine here, we just don't really know the answer!), you might get a better response on AWeb (http://www.accountingweb.co.uk). They are more allergic to doing folks homework than UKBF but if you can phrase it right and explain you are having trouble finding additional reading material etc, you might get somewhere. Good luck, sounds like a b*tch of an assignment!

GaryMc

16th February 2009, 07:46

If you are interested in Richard Murphy's views on tax then have a look at his blog and also look up the likes of Dennis Howlett and Prem Sikka (although Sikka mostly writes about auditing and the Big 4)

Murphy generally comments on tax avoidance and how everyone is looking to avoid their personal responsibility by trying to reduce their tax liabilities.

Some of his arguments are reasonable but some are just never going to happen

David Griffiths

16th February 2009, 08:12

Richard Murphy (http://www.taxresearch.org.uk/Blog/)

Dennis Howlett (http://www.accmanpro.com/)

macca87

16th February 2009, 12:56

I understand that some of his views are now not the best, having taken a deeper look at the article. However, it is not his corporation tax reformation views im interested in, it's the assumptions he thinks are flawed in the current corporation tax situation - namely "management and ownership are clearly distinguishable"

I don't understand why or how this relationship of being distinuguishable would effect corporation tax. I presume that you guys have no clue what he means either?!

Thanks,
Ross

P.s. ive taken a look through his blogs and he doesnt seem to even comment on the article that i have to look through!?

GaryMc

16th February 2009, 13:00

Can you point us in the direction of the article? You won't be able to post links yet but can you give us an idea of where it is?

macca87

16th February 2009, 13:12

That's the thing I can't find it!!!
It's in November's Issue of Accountancy Magazine.
Ive tried to find it on the net but as i say im having issues!

If you can find it and can help that would be brilliant!

P.s. Should have mentioned the article is called:

Two for One
Corporation Tax is dead: long live corporation tax!
Richard Murphy proposes a new regime.

GaryMc

16th February 2009, 13:19

Haven't got that issue with me but will have a look at home tonight

macca87

16th February 2009, 13:37

Thanks Gary,

I pretty much understand every other assumption he is speaking about but the management/ownership one is giving me some difficulties. I have an answer for the assumption that the group is ignored (you'll understand when you see it!) but im not sure if what i have is correct!

Thanks again,
Ross

David Griffiths

16th February 2009, 15:05

What's probably rattled Mr Murphy's cage is the way that directors in small companies pay themselves.

In big companies, the directors get paid a salary for the work that they do, and that's subject to tax and (more relevantly) national insurance. Tax is 20% this year, but the NIC is 11% for the employee and 12.8% for the employer. The salary and the employer NIC are expenses for the company in calculating the corporation tax, which for large companies is 28%. Any profit after tax can be ploughed back into the company, but some of it is usually paid out to the shareholders as dividends. Dividends are free of NIC, and if they are received by a basic rate taxpayer there is no further liability. (higher rate taxpayers pay and extra 25% of the actual cash dividend that they receive, which is equivalent to the difference between basic and higher rate tax)

Therefore management = reward for work = salary = PAYE and NIC
Ownership = reward for investments/risk = dividends = no NIC

Directors get paid for work done, shareholders get dividends on their investment. They are usually different people, although directors can and often do own shares in their company.

In small companies, the directors and shareholders are usually the same people, and although they are in theorey separate from the company, the tax burden in practical terms falls on them, even if it is corporation tax levied on the company. (If the company didn't pay it, there would be more left for them)

Bear in mind that when their salary from the company moves above £6,035 the government collects a total of 45.8p in total tax and NI.
Some people see that as rather unfair at that level of income.

What they do, therefore, is work for a low salary (as is their right) reducing the NI burdens. That leaves more money in the company, which then pays tax on its profits, and leaves more after tax profit to be distributed as a dividend - which of course is not subject to NI.

This can be perceived as paying the directors for their work (as managers) in dividends (which are normally paid to business owners). That upsets some people, who don't seem to have a problem with the 45.8% rate of tax at incomes below the national minimum wage.

GaryMc

16th February 2009, 15:09

Cheers David

That would have been my theory - but I didn't want to say anything until I had read the article as you never know what he might be going on about.

macca87

16th February 2009, 15:09

Hi David,

Thats exactly what i was thinking, but then i though how does this relate to Corporation Tax, the focus of the article. The way in which the directors/owners/managers pay themselves will affect their income tax, not the firms corporation tax or am i incorrect?

Thanks again,
Ross

Jenni384

16th February 2009, 15:15

Higher PAYE salary = bad tax burden on the individual, but lower CT. Overall, a higher tax take for the government.

More dividends = higher CT paid on the same amount of distributions to the individuals than if they took it as salary.

How you wish to comment on the above is down to you!

macca87

18th February 2009, 11:32

Hi guys,

i think im getting there with this!!!

Now if a firm's ownership and management are distinguishable it must be a company (plc.) who pay corporation tax... obviously!

However I have read on a website that a firm is able to reduce it's corporation tax liability with, and i quote, "careful planning, by making dividend payments to its shareholders, and by the use of a Company Pension Scheme." Are all these points still valid in today's corporation tax system?

The only reason i doubt this is that the same site says that companies are charged "10% tax on the first £10,000 taxable profits." This however is not correct as the boundaries have changed, or am i mistaken?

Thanks,
Ross

GaryMc

18th February 2009, 11:36

Yes the boundaries have changed and there is no 10% rate anymore

Dividends are paid out of post tax profits so will not affect the CT liability but pension payments could be used. There are pitfalls relating to the amount of contribution and the timing of payment though

I managed to find the article late last night but haven't read it yet. It doesn't look that big so probably won't contain much detail

macca87

18th February 2009, 11:38

Yeah that's the problem in that it doesn't contain much detail! Damn! Thought I was getting there!

The article was written last November so i presume that the budget had taken place and the dividends ruling was passed at the point of the article being written?

Is it "cheaper", excuse the word, to set up a company and pay corporation tax than to stay a sole trader and pay income tax?

winelight

18th February 2009, 20:23

I would just point out that what you may see referred to as the "small company" Corporation Tax rate is actually the "small profit" Corporation Tax rate. You will see that many very large companies - indeed, the UK's very largest - pay tax at the "small company" rate, through careful - um - avoidance schemes.

That's where the loss to exchequer is - not in anything small companies do with dividends.

billie1

19th February 2009, 10:34

macca87, some accountants advise to go down the company route only if you have a profit of £20,000 or more some advise you can benefit from a limited company with profits as little as £10,000. In my opinion the benefits of a limited company far outweighs that of a sole trader, however there is alot more responsibility in running a company rather than a sole trader.

GaryMc

20th February 2009, 11:40

Right, I have had a chance to look at the article
Murphy is basically calling for a change to the way that companies are taxed. The reason for this is that corporation tax is out of date and the realities of modern companies are such that the basis of CT i.e. profit before tax is wrong.
He argues that small companies are only there to save the owners some tax and that as a result small companies should be treated as if they are LLP’s and that the owners should pay tax on their share of profits not their combination of salary and dividends
The reasoning for this is that small co directors are hiding behind a company in order to ‘arrange their tax affairs so as to minimise their liability’. If the directors are taxed rather than the company, then they contribute more to society by paying their fair share of the social burden.
Large companies should be taxed on a group basis with a ratio of global profits (adjusted for capital transactions) used to work out the liability.

Williams lester

20th February 2009, 11:53