Shareholders of owner managed companies will often extract funds from the company by way of a loan account. Where a loan account is overdrawn at the company’s accounting year end a tax charge arises upon the company. The rate of tax to be applied will increase from 25% to 32.5% and will apply to loans made on or after 6 April 2016. This has been announced in order to align the rate to the dividend upper rate of tax.
The tax charge can be avoided by ensuring that the loan is repaid within nine months of the accounting year end.
The Chancellor announced a further reduction in Corporation Tax, which is currently charged on profits at 20%, with previously announced reductions to 19% from 1 April 2017 and then to 18% from 1 April 2020. Instead the rate will reduce from 19% to 17% on 1 April 2020. This measure will benefit over a million companies, large and small. It will ensure the UK has the lowest corporation tax rate in the G20.
The Chancellor announced changes to the use of trading losses which have to be carried forward by companies. Currently trading losses carried forward can only be utilised against future profits from the same trade. For losses incurred after 1 April 2017 businesses will be able to use these carried forward losses against profits from other income streams or from other companies within a group.
The Chancellor also announced a restriction of the amount of profit that can be offset through losses carried forward, limiting this to 50% of the amount of profit for the year. However this measure will only apply where profits are in excess of £5 million.