SMALL-BUSINESS minister Nigel Griffiths has justified the chancellor’s decision to impose a 19% tax on dividends distributed by small limited companies. The measure was necessary, he said, because they had been abusing the system. Gordon Brown announced in the budget that from April 6 incorporated companies must pay 19% corporation tax on dividends taken out of their company.
The news provoked an outcry among small businesses, because it came just two years after the chancellor introduced a zero tax rate for the first £10,000 profits made by a small company, regardless of whether the money was taken out as dividends.
Griffiths said: “Small businesses told the chancellor and they told me that if we gave them a tax break they would use that money to invest in their businesses.
“Sadly, they decided to take it out in income by switching it to dividends and putting it in their own pockets. That is not what the chancellor meant the tax break for. He meant it to pay for training, buy equipment and drive their businesses forward. So he decided that if it was being abused he would close the loophole.”
About 600,000 sole traders and partnerships have become limited companies since the chancellor introduced the zero-rate tax band two years ago.