IR591 - Small Business Dividend Tax

Alongside IR35 and Section 660, some small businesses may also be affected by another Inland Revenue tax rule which has become known as IR591 - so called after the paragraph in Gordon Brown's Pre-Budget report in which they were first mentioned (Para 5.91) of the chapter entitled "Building a Fairer Society".

Essentially, the IR591 proposals have been aimed at "increasing taxation on owner-operators of UK-based limited companies who derive most of their income from dividends".

From April 1st 2004, any company with annual profits of less than £10,000 and distributing that income as dividends will lose the starting 0% rate of Corporation tax, and be forced to pay 19% instead. Since 2004, however, the "small companies tax rate" has steadily risen - to 21% for the 2008/9 tax year, rising to 22% in the 2009/10 tax year.

The Treasury document which gave its name to IR591 can be read in full here (PDF). The relevant paragraph (5.91) is reproduced below:

5.91 The Government has introduced a range of measures and targeted tax reductions to support small businesses; including through reform of capital gains tax, reducing the rate of corporation tax for smaller companies and the introduction of a zero rate, Stakeholder Pensions, and the abolition of advance corporation tax. These measures are encouraging the creation of more small companies, including through self-employed people incorporating their businesses. The Government is keen to ensure the measures it has introduced provide support for these firms taking on the opportunities and responsibilities involved in that transition, and to encourage them to reinvest their profits and grow their businesses. At the same time, the Government is concerned that the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals’ tax liability, and that support should continue to be focused on growth. The Government will therefore bring forward specific proposals for action in Budget 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company, and so protect the benefits of low tax rates for the majority of small businesses.

Tax Treatment of Small Incorporated Businesses

The corporation tax main rate is 30 per cent. The small companies’ rate is 19 per cent for companies with taxable profits between £50,000 and £300,000, and the starting rate is zero for companies with taxable profits of £10,000 or less. Marginal relief applies to companies with profits between £10,000 and £50,000, and between £300,000 and £1,500,000.

From 1 April 2004, profits that are distributed from a company to an individual will be subject to a minimum of 19 per cent corporation tax. The lower rates above will continue to apply to profits that are reinvested in the company, or distributed to corporate entities, and companies with taxable profits subject to a rate of corporation tax of 19 per cent or higher will be unaffected.

Newly incorporated businesses are asked to complete the Inland Revenue Form CT41G, which provides basic tax information on the company and the company directors. Many companies already comply with this information request. Legislation will be brought forward in Finance Bill 2004 to make completion of this form compulsory.

Section 419 of the Income and Corporation Taxes Act is an anti-avoidance provision that applies a notional tax rate of 25 per cent to loans made to directors of close companies under specific circumstances.