Once the furore over the pre-Christmas proposed changes to the Transactions in Securities rules had died down, suddenly we were able to see that this wasn’t the only major news in the consultation document.

The condoc also focused on the situation where an owner manager chooses to build up cash in a company and then realises a sale of the shares to obtain CGT rates on effective extraction. Even this the condoc considers is undesirable from a tax policy perspective and proposes a return to the use of a now abolished system – close company apportionment.

In 1989, the then Conservative Government under Margaret Thatcher abolished the so-called close company apportionment rules which had been around since the 1920s. These provisions were intended to ensure that, where the directors of a successful family company decided not to distribute a substantial part of their post-tax trading and investment profits, they were deemed to have done so, subject to the retention of a reasonable sum for the working capital requirements of the business.

Given that the Chancellor of the Exchequer, Nigel Lawson, had recently harmonised income tax and capital gains tax rates at a maximum of 40%, it was considered that a measure designed to ensure that taxpayers should not benefit from a lower (or nil) rate on capital gains when the money could have been distributed as more highly taxed income in the form of a salary or dividend was now redundant.

Of course the main argument for a lower corporate income tax is that it encourages the reinvestment of profits into more people, property and plant. Naturally there will be those owner managers who do hoard cash and don’t reinvest but once the tax system starts discouraging reinvestment then the need for a different corporate tax and income tax ceases to exist and income tax may then merge back into one.

Furthermore, the definition of ‘excess profit’ will be hard to achieve without some crude mechanics which will no doubt fail to operate sensibly in many cases, with extreme cliff edges, and a probable lack of fairness. In addition, the impact upon the traditional target funded MBO would also be widespread – if companies are not holding excess cash then ‘soft MBOs’ will become a thing of the past. HMRC may well view this as a positive given their feelings in respect of TiS issues on MBOs generally.

Whether the re-introduction of these rules is likely or not is another matter. They would be controversial in the extreme and the SME business community would not take kindly to them. However I think we are all going to be nervous in the lead up to Budget Day on 16 March as I’m not sure we can be confident that there will be no changes listed.

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