Press Release December 2003

Hidden in the depths of Gordon Browns pre-Budget report were provisions to bring in National Insurance charges on the dividends paid out by shareholders of small Limited Companies.

Opticians who recently changed the structure of their business from being a sole trader or partnership to becoming a Limited Liability Company, could find themselves facing greatly increased National Insurance liabilities than they were before the proposed changes.

The problem for shareholders of Limited Companies is that whilst it is fairly easy to incorporate into a Limited Liability company, it is both complex and costly to change back into a sole trader or partnership without triggering tax bills.

Furthermore, the Inland Revenue are starting to attack "Husband & Wife" Limited Companies that pay out dividends to both spouses even though the profits are generated by only one spouse. Under a little known (and seldom-used) section of law, the Inland Revenue now believe they can issue back-dated assessments for additional tax where the profits have been generated by one spouse but shared for tax purposes between husband and wife (s.660a Settlements Legislation 1988).

Marc Bennett of AEL who specialise in Independent Opticians on tax & VAT matters said

“ Opticians looking to incorporate their business or transfer existing shares to a “non-active” spouse in order to reduce their tax bill, should seriously re-think their strategy. Not only could they face a large one-off bill for tax arrears under the settlements legislation, but they could also face a large increase in the amounts of national insurance payable by both themselves and their Limited Company.”

“ AEL felt this move has been coming from the Inland Revenue for some time and have held back on advising clients to incorporate whilst further clarification is sought. We would strongly advise Independent Opticians to seek immediate professional advice on the tax structure of their business as burying one’s head in the sand could prove very costly”.

It is speculated that the National Insurance increases on dividends will be announced as part of the 2004 budget, and may be imposed as early as from the start of the new tax year (6 April 2004).

For further details please contact Marc Bennett at Alexander edward Lee on 020 7433 6940 or mbennett@alexedlee.co.uk.