It was originally introduced in classical form to encourage the retention of earnings by companies, in the hope that this would stimulate investment . The reversion to something closer to the classical system was justified on the same grounds. Some economists argue that the allocation of capital resources is best determined by the capital market , and would prefer to see a higher proportion of dividends distributed and then rechannelled back to investment via the capital market. Moreover, the possibility of tax avoidance by individual investors liable to high rates of tax in close companies has in the past led to the application of special rules to enforce distributions by these companies, so-called shortfall assessments . Close-company tax law is somewhat complex, and there are also special provisions regarding loans to participators, interest and salaries or fees paid to directors as well as special reliefs for small trading companies.
Companies are also liable to corporation tax on capital gains .
There is also a special relief for persons of retirement age. The Penguin Dictionary of Economics 3. profit The Penguin Dictionary of Economics 4. The Penguin Dictionary of Economics 5. All rights reserved.