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Last Updated: Wednesday, 10 December, 2003, 18:47 GMT
Tax shock for small businesses
By Sarah Toyne
BBC News Online personal finance reporter

A new clampdown on the taxation of small businesses could be on the cards, BBC News Online has learned.

The move could mean some small owner-managed businesses will pay much higher income tax and national insurance bills.

The government believes that some companies are taking advantage of generous provisions, which allow firms to make tax and national insurance savings on dividend payments.

Experts said the impact could be far greater than IR35, a controversial tax on personal service companies popular with IT contractors and could affect up to 300,000 businesses.

Dividend payments

Most small businesses take a large proportion of their profits as dividends.

This is advantageous because there is no national insurance on dividends.

Basic-rate taxpayers can also make income tax savings.

It is a tax measure used by hundreds of thousands of businesses around the country.

Anne Redston of Ernst & Young told BBC News Online: "This is the bombshell of this pre-Budget, because it could affect so many ordinary people - from fish and chip shops to window cleaners."


The Federation of Small Businesses told BBC News Online any changes could potentially affect 300,000 businesses.

Stephan Alambritis, a spokesman, said the move could stunt business growth and entrepreneurship.

"These companies need to be encouraged so they can go on and become medium-sized companies, and to employ lots of people (which is how to counter unemployment)."

The Treasury said it would take into account these sorts of concerns, suggesting it would reward companies who reinvested their profits into their businesses.

A spokesman added that it would be conducting an open consultation on the proposals.

"We want to make sure that the tax structure is used in the way it was intended", a spokesman said.

The Treasury says the aim is to make the tax system fairer between different types of taxpayers.

Some experts think the change will raise over 1bn in extra tax for the government.

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