UK Budget Anti-Avoidance Measure Will Fail, CIOT Says

A significant cut to the dividend tax allowance announced in the UK Budget will not deter people from incorporating their own business to take advantage of lower corporation tax rates, the Chartered Institute of Taxation (CIOT) has said.

The Government will reduce the tax-free dividend allowance, which affects owner managers taking money out of their companies, as well as some other taxpayers to GBP2,000 (USD2,433) from GBP5,000 a year in April 2018.

John Cullinane, Tax Policy Director of the CIOT, commented: “The ‘dividend allowance’ was first announced in the Summer Budget 2015, less than two years ago. It was part of a complete overhaul of the dividend tax system, announced without prior consultation, and was also introduced with the intention of tackling the problem of tax-motivated incorporation. Clearly the 2015 reform of dividend taxation did not achieve its intended objective. We believe the key lesson is that there should be consultation in advance of such major changes, to ensure that the public understand the reasons for them, and that with the benefit of a proper debate, the Government [is] able to get the reforms right.”

“Even now, the change to the dividend allowance announced today will not remove the problem. For example, for a basic rate taxpayer, the impact of that change cannot exceed GBP225 per year, a fraction of the typical tax benefits of incorporation at such levels of income. Incorporation would also enable a self-employed entrepreneur to sidestep the increases in Class 4 national insurance also announced by the Chancellor and taking effect in 2018 and 2019. Clearly the Chancellor will need to return to this issue. We hope that he will consult fully before he does so.”