§ One part of the tax code which has come in for considerable criticism is that which governs close companies. I am very conscious of the burden which some of the close company provisions, particularly those relating to shortfall, now place upon directors and their advisers. I therefore propose to take steps this year to alleviate it in advance of the major reform which I have already announced.
§ As the law now stands, trading companies do not have to justify the level of distributions out of their trading income if that income is less than £1,500. I propose to raise this limit to £5,000, with marginal relief up to £15,000, and to extend the exemption to investment income provided that it does not exceed 10 per cent. of the trading income or £500, whichever is the less. These changes will simplify substantially the administration of the shortfall provisions 1386 both for the Inland Revenue and for the professional advisers of companies. The important consequence of this change is that it will remove altogether from the scope of the shortfall provisions more than half of the trading companies which at present fall within them. The cost is estimated to be £2 million in the first year and £3 million in a full year.
§ These proposals are part of what I hope will be a continuing process of simplifying business taxation. I should remind the House that I began this process when I announced last October the new and simpler system of tax allowances for capital expenditure, and on this I can now announce a further small step. The Finance Bill will contain new rules for calculating these allowances which, for the continuing business, will largely dispense with balancing charges and allowances when machinery or plant bought since last October is disposed of.