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Feature
MPs moot a new legal entity for 21st century small business
Following the Treasury’s decision to defer the proposed “income shifting” legislation for a year, a cross party group of 3 MPs have decided not only to encourage fresh debate on the whole topic of small business taxation, but also to ask HM Treasury to consider providing small business with a new entity designed for business in the 21st Century.MPs David Drew, Bob Spink and Peter Bottomley have tabled a new Early Day motion in the Commons "Income shifting and the future of small business taxation" asking for a review of more appropriate means of providing smaller enterprises with a suitable legal entity.
Will the idea of a new business entity be welcome amongst practicing accountants? AccountingWEB’s tax editor, Nichola Ross Martin, discounted it only last week in considering the Budget announcement of the a reopening of the past review of small business taxation. “I can see a simpler system is desirable, but small business is not a sort of process which can be automated. The Treasury is doing the right thing in trying to simplify the existing system and the last thing we need is to turn everything on its head and try and start again.
George Bull, Head of Tax at Baker Tilly says,"I don't think that there is any call for a new legal entity. At the heart of this EDM are the same problems for HMRC. How do you value the contribution of different people in a small business? You end up with the same problem of having to find a statutory method of measuring an individual contribution to a business.
Bearing in mind the fiasco of the "nil" rate corporation tax band, we can see how dangerous it to have a tax led structure".
Tax campaigner Richard Murphy was quick to welcome the idea, “Small business does not now need a ‘lash up’ solution on income shifting. Real change is needed to provide it with an appropriate structure and accounting and tax environment for the 21st century.”
Murphy's views are extreme; he demands a route whereby seemingly every detail is controlled by statute, and could involve mandatory reclassification of businesses as LPs as well as extra tax surcharges. Observers may note that small business is already over burdened after years and years of increased regulations which are by no means all tax based in any case.
Text of proposed EDM 1195:
"That this House welcomes the decision announced in the Budget to defer legislation on what has been described as income shifting within small limited companies and partnerships; and calls on HM Treasury and other affected departments to use the additional year that they have allowed themselves for consultation on this issue to undertake a thorough review of more appropriate means of providing smaller enterprises with a suitable legal entity designed for use in the 21st Century, and not the 19th Century as the limited company was, that will simultaneously reduce the taxation, accounting and regulatory burdens on smaller enterprises, so freeing them to generate wealth and employment in the UK economy, whilst ensuring that they can with minimum effort comply with the taxation and other requirements imposed upon them by law in a way that minimises risk of tax avoidance, creates a level playing field in which all in the sector can compete fairly and ensures that the right person is taxed on the reward they have earned at the right time and in ways which do not create artificial and inappropriate incentives to recategorise employment as self-employment, and the reward for labour effort expended as investment income."
AccountingWEB.co.uk 19-Mar-2008
Categories: Tax News, Tax - Nicki Ross Martin
Times read: 6736
The problem is not difficult to solve Nick. We need a different system of contributing to running the country. That has to be done by the higher earners contributing more. The flat rate system follows that thinking.
As I previosly stated once profit/earnings has been established there should be no difference in the rate of contributions. In fact you could do away with all business entities apart from Limited Liability Companies. Shareholders would have no salary but be paid dividends which would be added to income to find out final earnings figure.
This is not going to happen so we have to put proposals on how to tinker with the present system, basically to shift tax. This is where different points of view come across which sometimes can be varied to the extreme - but that is what a debate is all about.
The danger of simplifying taxation is of course the inevitable re-distribution of income that it creates eg recent CGT simplification. However this should not, with suitable transitional arrangements be an obstacle. A radical simplification should include in my view:
Abolition of Capital Allowances (Now we have robust Accounting standards they are pointless)
Abolish CT for small companies and tax sole traders and partnerships on drawings/distributions instead of business profits. Thus only individuals would be taxed, and, only on their "salary" just like employed people.
With the latter you could abolish non residence and non domiciliary arrangements, taxing instead on a remittance basis.
Have a flat tax rate including NIC, but with a large tax free allowance to keep it progressive. For example £10k pa tax free and 35% tax and NI on everything else.
@Vaughan
"Mike, I am not sure that I see the difference between the risk of no work for a labour only contractor and the risk of no work (redundancy) for an employee."
Employees have legislation and HR departments to protect their employment terms and conditions, as well as redundancy packages and pay. Labour-only workers can be out of work at the end of a week.
"The other point you make is that as an employee your earnings are halved, incentive indeed to be an SME without tax breaks as well."
In the context I was referring to, the only work available to former contractors did not reflect their experience and seniority, hence they were only able to take up "commodity" work, as opposed to a senior technical or management role that would otherwise be their appropriate position.
It is a fallacy that labour-only workers, especially in the IT sector, are contracted to do the work they would otherwise do as an employee anyway.
Alastair - why is a discussion about fundamental principles not what this thread is about? The government, for good or evil, perceives a problem it wishes to address. Not for the first, or I suspect last, time, it has rushed to issue an ill-conceived proposal that nobody likes. Accountants then rush to defend the status quo or propose detailed alternatives that are equally flawed. If we could find some agreement on the problem - and that can only come via consensus on fundamental principles - we would give ourselves a much greater chance of arriving at a fair and reasonable solution to that problem.
If I'm stating the obvious regarding principles, I apologise for patronising. But few other comments have, implicitly or explicitly, acknowledged why principles are crucial.
Steven - as I pointed out, my proposed principles represented neither an exclusive nor an exhaustive list. But the existence of other abuses that need to be addressed surely doesn't render half-baked a completely separate point?
Steven and Paul - my personal opinion is that flat rate tax breaches any civilised view of justice because it necessarily impacts negatively on the economically weak while benefitting the econically strong. Because I beleve that one of the biggest problems of the our economy is the redirection of wealth into fewer and fewer hands through unfettered capitalism and taxation policy, I also believe that any argument for the simplicity of flat rate tax is simply overwhelmed by a far greater need to counter economic dictatorship.
John - if we all agreed (with a little variation) on what has to be done, why have so many people expressed so many different opinions, albeit largely framed around a viewpoint that the problem is simply to difficult to address?
comments creeping in about tax take and spending of that tax, and the morality of paying tax; not to mention the morality of some of the commenters (which is not in doubt!). This is of course perfectly legitimate debate, but that is not what this thread is about.
Let me try to view the point you raised from another angle:
1 All those who accept the benefits of living in a particular society, regardless of their origin or nationality, must also accept the obligation to fund, via taxation, the provision of those benefits.
The papers have just reported that the house of commons speaker had spent 700k (and another 900k on security) tax free. So, those who accept the benefit provided by the society must also accept the responsibility of enjoying those benefit honest;y. Until then, the half baked principle does not work. And I suppose statement one applies to MP and government officers as well ?
2 In assessing income to be taxed, its nature - whether it arises from the provision of labour or capital - and the legal structure through which it arises, should be disregarded.
and
3 Assessed income should be taxed at similar, if not identical, rates regardless of the legal structure through which it arises.
I suppose this apply when it is in favour to tax payer as well? e.g., if I run a UK ompany from overseas (non residence) then the entire company C
T should be 0? (all those control companies rule shoundn't apply then if fiscal transparency is sought)
4 In a civilised society, the bulk of taxation must be progressive, ie based on ability to pay.
A flat tax works perfectly well in achieving this as 20% of 100k is more than 20% of 20k ?
5 Calculating tax payable should be as simple as practicably possible so that taxpayers have the best possible opportunity to pay the right amount of tax at the right time.
I suppose the current dividend arrangement works just fine then as well as taxpayer already understand how that works and are paying the right amount of tax as prescribed by the law..
Nick - some of you ideas are great. Self-assessment was to be fair but in the end this was cast aside because it was too dificult to legislate. Progessive taxation is not a necessity look at some of the states that have evolved from the USSR they have just one tax rate!
Richard I have already pointed out that LLP members can be sued as well as the LLP. This makes the Ltd Company preferential to protect one's assets if things go wrong.
Surely if one wants all entreprenurs to suffer the same rate then for taxation purposes the profits from Ltd liabillity Companies with less than say 10 members, ought to be treated as income of the shareholders. That share of the net profit be taxed as if he or she is self-employed. The tax bill being paid by the Company.
That having said the Tax system is in a mess because Senior Politicians love power and to make changes in Law gives them a thrill
If you read all comments carefully you will realise that we all agree (with a little variation) of what has to be done.
Trouble is the Government of the day will not make tax simple because it then shows up all their faults. Simplicity will directly link cock-ups to tax rises and no Government will put themselves in that sort of firing line. They will not be able to hide behind stealth taxes etc.
As most of us realise this, we then have no alternative but to offer less taxing ways of tinkering or less tinkering ways of taxing.
The working together regime said it in a nutshell. All comments welcome within the current tax environment.
What we need is CHANGE not shifting.
It's undeniable that our taxation system is in a mess, reflecting as it does a chaotic mix of quick fixes to address perceived problems.
What I find most interesting about this debate is how most comments go straight into the nitty-gritty without anyone, as far as I can see, suggesting any need to establish some principles on which the majority can agree and the consequential development of proposals that match those principles.
Some ideas on what those principles might be:
1 All those who accept the benefits of living in a particular society, regardless of their origin or nationality, must also accept the obligation to fund, via taxation, the provision of those benefits.
2 In assessing income to be taxed, its nature - whether it arises from the provision of labour or capital - and the legal structure through which it arises, should be disregarded.
3 Assessed income should be taxed at similar, if not identical, rates regardless of the legal structure through which it arises.
4 In a civilised society, the bulk of taxation must be progressive, ie based on ability to pay.
5 Calculating tax payable should be as simple as practicably possible so that taxpayers have the best possible opportunity to pay the right amount of tax at the right time.
Of course, this is by no means an exclusive or exhaustive list but perhaps, just perhaps, if some agreement around principles can be found, then identifying a rational basis for amending our tax system has a far greater likelihood of success than thrashing around in the detail without any clear guidance.
A footnote: To describe Richard Murphy as an extremist is a step too far when fairness above all else is so clearly his motivation. However robustly he presents his arguments, I believe he is far more in tune with the mood of the majority than apologists for the status quo or some variation of it. While I don't agree with all Richard says or proposes, I do have great respect for what seems to me to be the fairness and humanity that drive his comments.
Mike, I am not sure that I see the difference between the risk of no work for a labour only contractor and the risk of no work (redundancy) for an employee.
The other point you make is that as an employee your earnings are halved, incentive indeed to be an SME without tax breaks as well.
John, I don't think that anybody has it in for IT consultants, I have all sorts of labour only contractors, however 90% of them are invoved in IT in someway.
I am trying to draw a difference between labour only contractors whose worst risk is no work to someone who borrows £100,000 secured on his house to buy & run a small manufacturing business.
Clearly the "risk v. reward" equation does not apply to the fabled "City traders" who appear to be able to gain vast rewards but at worst just lose their jobs or be demoted, i.e. risk is minimal, and reward is not in proportion.
I have not called for a new entity
I have called for restrictions on the ability to use a limited company
And encouragement for the use of LLPs
There is no new entity involved in this plan
PS I warmly commend Vaughan Blake's comment - spot on. Clearly a thinking accountant aware that tax is at the tail end of the small business equation and enterprise right at the front. Why aren't there ore like that?
I am in a similar position to John Williams - over 60, have been running my own company for 15 years providing technical consultancy services (and before that for 12 years founding and running a software company which grew to 30 staff worldwide, £3m turnover, and won two Queen's Awards). For more than 11 years we have not needed to use any accountancy services: I have dealt with all the company's financial and tax matters myself. My wife helps me in the business and we share equally in the profits. We pay all the tax that is legally due. We are not claiming any State benefits. We didn't ask for the 10% or 0% starting rate of corporation tax, and certainly didn't welcome the non-corporate dividends regime as a 'solution' to the inevitable 'problems'.
What we need is just tax stability and perhaps some simplification - but not politically motivated incentives (0%CT) or punishment (for not being perceived as a 'real' business? or for paying my wife her fair share of the business profits), and certainly not "modernisation" or some fancy new business entity that we might be forced to use in place of the simple and well understood private limited liability company.
It is clear to me that the attitude that IT consultants are not running "genuine" businesses is endemic in the non IT community. Such bias with weak and illogical arguments only supports that point of view. We see no mention of other types of services provided through limited companies. It's only IT consultancies that are debated.
Nichola Ross Martin made a Freudian slip when she started another debate by giving examples related to IT consultancies. So despite her later remarks, the underlying attitude is still there.
The problem with this type of forum is that previous posts are rarely looked at by new individuals joining the debate. If recent posters had perused my earlier posts, perhaps they might be more guarded with their opinions.
The truth is a wonderful weapon and shield. The crux of this debate hinges on my contention that the non IT community does not regard IT consultancies as "genuine" businesses and considers them to be pseudo employees. This is only to be expected as it is also my contention that the accountancy profession is an arm of the establishment which views the IT community with disdain.
@Vaughan:
You seem to have omitted the risk of no (economic) work for "labour" (services) only.
Post "9/11" there was no IT consultancy work at other than shelf-stacking rates for getting on for a year ... and once you bite the bullet and take the only full-time "employee" job you can get (which does not reflect your experience) at half the pay, without travel, accommodation and subsistence expenses, you have no hours left to search out new business ...
Flat tax will solve this in a much simpler way and to ensure equalisation of tax through various forms.. (and included the NI charge within the flat tax rate)..
If we are to provide incentives to SMEs are they to be scaled up if the risk is greater and down if no risk?
Whilst I accept that they are real businesses, a labour only contractor (IT consultant, train driver it matters not) takes no risk in real terms. He either works or he does not. Should he be subsidised by employees in "safe" employments? Alternatively should someone be heavily "incentivised" to start a very high risk operation? This is the problem.
Neil, in pocketing the £2000 saving by using a company you dismiss the "company car dynamic" costs too readily. I accept that it depends on the car type and the running costs.
I have a "consultant" client who does a lot of international travel, his UK travel is very limited. His annual mileage is 5000 of which 75% is business. He has a new Jaguar every three years. Do the maths, the £2000 tax saving by using a company becomes small potatoes.
OK I accept an extreme example, but unless you run a small cheap low Co2 car it will cost more in a company and eats into your £2000.
You state that the extra cost of a company is £50 and that you can use all sorts of software to save paying an accountant to comply with the formalities. Does your time not have a cost? Could you not have more chargeable time if you did not need to do these things?
You may be happy and able to do all the extra things required to minimise accountants costs, my own experience is that my clients are unwilling or able to run a payroll, prepare minutes, file annual returns prepare abbreviated accounts etc etc.
It would be very wrong to advise a client to incorporate with promises of a £2000 tax saving without pointing out the extra costs and hassle involved.
Neil Wilson -
"they exchange those employment rights for cash in terms of extra profit"
exactly - they take advantage of the less onerous tax regime to make up for the loss of employment rights. If you level the playing field between employed people and SME's then you remove that incentive. I'm afraid Neil your arguments for levelling the tax field are very weak indeed and clearly are illogical. There has to be sufficient incentive (and not a hope of rewards in the future) for SME's to be created and to continue to trade.
As I side issue, what I observe is happening is that individuals are setting up a particular business with grants from local councils, trading for a relatively short time and then closing that business, whilst seeking further grants to set up in another unrelated type of business.
I believe I saw a statistic, granted some time ago now, which intimated that the average life of an SME was less than 5 years. I've been trading as "not a real business" for 12 years, paying all the taxes that were due and keeping myself and my wife off the dole queue.
Being 60 (and having contributed NIC's for the maximum of 43 years) and my wife 58, it would be unlikely that we could find permanent employment. So in nett terms we are contributing our fair share of taxes, and we have a right to enjoy our fair share of the benefits. This is the issue that many of the posters on this forum seem to ignore or want to eliminate, particularly for IT consultancies.
Nice to see such lateral thinking. Let's get this straight: are you talking gross income or profit? Because as soon as you talk profit you have creative accounting and go round in circles again...
You have to work with profit, and yes that exposes the issues of what expenses are allowable. But then again I don't want us all to be put out of business!
Perhaps I should have put it the other way - employees should be taxed on the same profit calculation as traders with the job being the basis for the 'wholly and exclusively' restriction.
There is a lot to be gained from equalising and rethinking the deductions regime - including questions about offsets for childcare and domestic assistance from non-working spouses if we want to go that far.
But if you have to pay your accountant an extra £500 to £1,000 for minutes, forms, payroll, P11D's, and if you accept that in the real world £40k sch D is not £40k limited co (in other woirds, other costs will come in too - like businss motoring dynamic) then there is not enough on the table to make it worth going to the expense of incorporating.
(i) Incorporation running costs should be £50 per annum, not £1000. Certainly once HMRC forces freely available filing software over the next year or so you will see those costs plummet.
(ii) The savings are £2000 in your pocket *per year* almost all in National Insurance, and providing access to National Insurance benefits unavailable to sole traders. Where's the net present value calculation for the next decade?
(iii) Pension contributions are cheaper, and you get a lot more opportunity to make the tax credit system work to your advantage in a company (by taking a biannual view of payments if you have a client who can manage their cashflow).
I'm sorry but accountants effectively stating "I could save you £1000 or £2000 in tax but I'm not going to" really should retire. You'd have to fiddle a fair amount of expenses to get that sort of saving.
NeilW
@John
A sole trader earning £50000 pa, and I know at least 2 who are earning less than that, would not receive any employment benefits, whereas an employee earning the same would
Yes, but they exchange those employment rights for cash in terms of extra profit. If the individual doesn't like that then they can stop working for themselves and go and get a proper job. The market will adjust the rates appropriately.
The one thing I would adjust if National Insurance is equalised (or folded into Income Tax where it belongs) is to make sure that self-employed people can get the same NI benefits as employed people. Again that is something you get if you're incorporated for zero cost that you don't get if you are unincorporated and pay 8% NI.
Employment benefits is the insurance you give up to become your own boss. It is nuts that society puts all these protections in place and then provides a tax incentive to get out of them.
NeilW
@ Rogie K
I agree wholeheartedly with your comments; more people should be aware of the realities of small businesses, which is part of the problem.
Incidentally, my comment re £40k is really that only above that level of profit does incorporation of a sole trader become tax driven. The savings (gross) next year are around £2,000 in tax and NIC. But if you have to pay your accountant an extra £500 to £1,000 for minutes, forms, payroll, P11D's, and if you accept that in the real world £40k sch D is not £40k limited co (in other woirds, other costs will come in too - like businss motoring dynamic) then there is not enough on the table to make it worth going to the expense of incorporating. If you are already a company, then the savings, as you say are worth having, particularly if you (or the spouse) can DIY a lot of the paperwork. If you are Schedule D then I would look for other factors to suggest limited company status, and not purely tax.
Yes, I too have looked at a wage at Tesco and (at least hitherto) putting your capital in a building society for clients (but now the investment in a village store might look safe compared to some!). It sharpens the mind wonderfully.
And finally - please also spare a thought for the many over 50's who probably could only get a job at Tesco's or B & Q in spite of their considerable experience. Many of them are self employed as a second career having been made redundant and unable to get a suitable job. They are not in it for the "tax fiddles" and the lifestyle choice is to eat & pay mortgage, or not......
there to be a difference between the profits that a business earns, and the income that the owners take from that business. Not least because profit is not the same as cash, and equally because for many small businesses profit is a major source of future investment.
A number of commenters seem to be blurring that distinction, but it would be shame if any tinkering were to remove it.
Note to RR and NRM - I understood that in this utopia they did not actually have to shop themselves!
"There is absolutely no reason at all why businesses shouldn't be taxed the same way and to the same extent as employed individuals. "
This would only work if there were to be a level playing field. A sole trader earning £50000 pa, and I know at least 2 who are earning less than that, would not receive any employment benefits, whereas an employee earning the same would. So you will never be able to tax them the same until the employee loses the employment benefits, and I don't think you'd get that past the trade union movement. Furthermore, for those caught by IR35, they pay more tax than any other organisation or individual on the same level of income without receiving any employment benefits. Can that be fair?
As I've said before, "fairness" in taxation only exists where it increases the tax take, any "fairness" which reduces the tax take is called "avoidance".
"The reward for risk is the higher price you can charge for your goods and services or the profit you can earn of the back of your (lower-paid) employees.
Anything else is a market distortion.
There is absolutely no reason at all why businesses shouldn't be taxed the same way and to the same extent as employed individuals. "
Nice to see such lateral thinking. Let's get this straight: are you talking gross income or profit? Because as soon as you talk profit you have creative accounting and go round in circles again... but if you talk gross income you need to have much lower nominal tax rates (for example for a company whose nominal profit is 20% of gross, 10% on gross would equate to circa 50% tax rate on (edit: nominal) profit).
Entrepreneurs don't set up businesses for tax breaks. They set them up for glory. The reward for risk is the higher price you can charge for your goods and services or the profit you can earn of the back of your (lower-paid) employees.
Anything else is a market distortion.
There is absolutely no reason at all why businesses shouldn't be taxed the same way and to the same extent as employed individuals. I see no evidence at all that society gets a return for tax breaks for businesses. At best it is employment, in which case getting rid of secondary national insurance contributions seems like the best way to 'incentivise' that.
For me I would want to see the same look through progressive taxation arrangement employed on all legal entities for trading, employment and property incomes until the current and tangible depreciating fixed assets in use in the business exceeded some ceiling (say £100K). At which point you could switch to a corporate tax regime more suited to dealing with international tax competition.
And yes that would include getting rid of the 'necessarily' restriction on employment expenses, so that the tax system reflects the modern reality of employees paying for their own training and equipment.
Once you define taxation in terms of employed tangible capital at risk (ie hard cash) you eliminate all sorts of opportunities for diddling.
Some contributors (edit: along with the EDM itself) have suggested imposing statutory requirement(s) making prospective members of limited companies jump through hoops to the taste of the government du jour.
Beyond de minimis, I think this may be fanciful. The last time this was tried was the Limited Liability Act 1855. Insofar as this was a government attempt to destroy the level playing field between small and large business, it was knocked on the head in the infamous Salomon case of 1897. This in effect permitted businesses of any size to incorporate (aka receive equal benefit from incorporation) irrespective of statute. Despite the Law Lords’ open defiance of Parliament, throughout the whole of the twentieth century no government cared to risk revisiting this anomaly, until earlier this decade EC law finally reconciled UK statute and common law.
Conclusion: company law is another of the many tricky policy-driven areas where Parliamentary supremacy was always more fictive than real. One possible reason for such graceful legislative acrobatics as IR35 and the FBT: if the judges are going to pretend companies are something other than what anti-small-business Parliaments say they are, Parliament can partly outflank them by instructing them to pretend something else again: that the companies don't even exist.
All this technical theory is fine but picture this...
I run a small business via a limited company. I set up from scratch following redundancy (without a payout). All I have to sell is my services and I do this to a number of clients (i.e. I'm not a contractor) Every business decision I have made in the last 3 years has put my family at a financial risk, yet I have survived to get to a stable position, employing (unrelated) staff and generating a reasonable living because of three factors:
- a lot of hard work
- the financial benefit of being able to regulate the timing and quantity of my tax bill by efficient use of existing law to pay dividends instead of NIC's
- the unending support of my wife.
My wife has not only given me the confidence to do what I have done and her support, but has given advice, helped out when I needed it, taken legal responsbility as company secretary, even painted my office walls. She has never received an income for any of this.
If I were to, say in a year's time, give her some shares in return for her considerable investment of time and effort and (yes) emotion, and then to vote a substantial dividend, then some of these suggestions would have me hounded by the government as a tax avoider because in that particular year she only answered the phone twice.
Yes the system sucks in places, but keep it real guys. Any one who thinks you can put a value on the support of a spouse (or partner, civil or otherwise) based on an annual formula has never worked in the real world. Maybe I could have a lifetime's "Wifes Wages Allowance" ? Lets see the record keeping reqiurement for that.
Are the majority of "one-man" companies really scheming, tax avoiding IT (etc) contractors? Has any one evaluated the problem before we spend millions of the tax we are trying to raise by creating new complexity in an already over-complex system?
The problem (once you get beyond the introduction of "Independent Taxation" in the 80's?) seems to be NI, which is only another form of tax anyway. Lets abolish it and have an honest tax system with transparent rates before we start accusing the small business community which supports this county of (albeit, legally) fiddling the lousy system that the Government created for us.
Oh and Rebecca, the tax(NI) saving at £40k is worth while if you only earn £40k - it's the price of a well earned if modest holiday. It can also be used to build a business, feed your kids for a month or buy half a tank of petrol at current prices. Not much when you're earning £100+kpa but most of us don't.
I don't see that you can factor in extra reward for risk either before or after the taxable profit has been calculated.
If we are to avoid dividend V salary, sole trader v Ltd co, type problems the choice of trading vehicle must be tax neutral. So yes, a self employed "entrepreneur" earning £50K should pay the same as an employee on a £50K salary.
The "entrepreneur" will claim no holidays etc etc but that is their choice and in theory they are building up a business that can be sold or they enjoy a work life balance not acheivable as an employee. If they can get the same (or better) deal in the longer term working for someone else then logic says they should take it. Why risk your house, health, marriage etc if you can have a better, wealthier life as an employee? The tax system should not feature in the decision.
I regularly ask struggling small clients to tell me how many hours they worked in/on their business in the last 12 months. I then apply the the national minimum wage to those hours, factor in holiday pay and compare it to their profit. It is a useful tool to make them focus on why they are doing this and where it is going and how they are going to acheive it. Sometimes the answer is that they would be better off & happier stacking shelves in Tesco and sometimes the answer is "yes but this time next year......"!
...got a second chance, I believe?
I don't know about Lazarus, but self employed tax gatherers are well enough known - tax farming they used to call it, and it used to be quoted as a leading cause of the French revolution...
NRM
The rewards for the business are being able to work or do what you want when you want (certain industries will be restricted) and have the ability to earn megabucks or have other people earn you megabucks.
So I see no reason for a system to be intoduced that has every CUSTOMER contributing at the same rate. The more you earn the more you contribute.
There could be a figure of say £10k before customers started contributing.
The alternative is to scrap business altogether with every customer working for the Government and recieving pocket money at the end of the day.
Ah well back to tinkering.
I thought they were all property developers - but at our expense in a tax free environment
How about mandating that only MPs with experience of running their own business could contribute ...
But I don't see previous experience featuring in any cabinet appointment criteria.
I don't know, might suit you, but I don't know if I could stand the hassle of two homes and being made to shop in John Lewis all the time...
The black economy looks almost as promising.
I seem to recall being taught that Lazarus was a self employed tax man, and look what happened to him.
Imagine. The tax man's given a quota by his client (Gordon) and a set of victims from whom to extract as much as he can, with the promise of a phalanx of large blokes with sharp pointy sticks to enforce his efforts.
No wonder they're still uppity over there in Israel after 2000 years.
I have a vision of a new type of tax system for individuals that could be implemented with little hassle. I have in mind arrangements that are much more favourable than existing arrangements for both employee and businesspersons, eg:
1. preferential tax, pension and benefit in kind arrangements,
2. little or no scrutiny and audit of (tax free) expenses
3. ability to employ people at public expense who do much of your work for you or even do no work in return for their salary which is paid not by you
4. ability to rack up legal fees not at your own expense to contest. determinations connected with changes to your arrangements
6. salary review based not on performance appraisal, opinion of boss but by reference to a blanket review body.
7. abililty to vote on own pay
I know, it's utopia - such a system could never exist in the real world.
1 For protection why can we not have a Ltd Liabillity Sole Trader - I belive they do in Spain.
2 LLP Members can still be sued as well as the LLP
3 For business people the current lighter taxation model is supposed to reward for risk and also because there is achance for employment of others
4 Employees have higher taxation because the risk is less.
The treasury (and HMRC ) are the worse people to develop any models since they are all in Category 4. Perhaps this should change.
I am hopeful that the debate on this thread will run and eventually influence a useful outcome.
Interesting to note that the CIOT has just endorsed this EDM in a press release available at http://www.politics.co.uk/press-releases/ciot-welcomes-second-edm-on-income-shifting-$1215484.htm
Are they extremists?
Or is there, after all, some merit to this suggestion? Rob Ellerby, chair of the CIOT certainly seems to think so.
@Nichola R M
"... should pay the same amount of tax as an employee earning the same ..."
But this clearly does not happen if a worker is under IR35, since she has to pay both employer's and employee's NI out of the same pot, among other things ... a higher marginal rate of tax than an employee would have to pay.
So these post-1997 Govt. "knowledge economy" (T. Blair) worker measures clearly do not have equality of treatment as their intent.
What do people think about incentiving small business? Granted it was the 0% CT break that got us into this mess, but before then, it was always cheaper to incorporate, just not quite so cheap.
On one side we have an idea that everyone should be paying their share of tax, so if I run a small business and earn £50k pa I should pay the same amount of tax as an employee earning the same.
But...the employee is paid for holidays, possibly gets free lunch/phone/computer and if paid when ill and may well be getting some good pension benefits too, then actually, the employee may be better off. In fact you would have to be something of a masochist surely to want to run a small business when it costs you so much?
So do we support the notion that there should be no reward for risk if you are a small business, (I am ignoring the obviously different treatment afforded to those who run small private equity businesses here!) or what?
How many times have we been here and still no further forward.
There is no reason why any business should be taxed differently to any other once a net profit, investment etc. has been arrived at.
Our whole way of financing public spending has to change. Yes it will still come from tax payers (oops customers) (do you know that HMRC get reprimanded if they do not use the right wording). As Tony Blair once put it admirably "education, education then Gordon Brown stepped in with "lets get as much as we can by using the word RIGHT""
We all need to be educated that running a country costs money and there has to be a new FAIR way of raising that money from whatever source is available.
Trouble is no government will take on the massive task to take our grandchildren into the 22nd century.
@Ken Howard
Just to point out a couple of things (not clear from your posts if this is understood)
The "agencies" in question act for the end clients, not for the people supplying the work. Hence there is a conflict of interest if the worker were to become an "employee" of the agency.
It is clearly not in the worker's interest to be tied to a given agency if they can get a better deal via a different agency.
Also since a contract worker may work for several clients a year through different agencies, it is not clear how easy de- and re-employing continually would be.
Travel and other costs need to be paid even in the event of an unsuccessful interview with a client; additionally, training courses, insurance, equipment, etc.
Who would be the "employer" in this case when between engagements ?
Similarly, pension schemes are conventionally contributed to by the worker's company pre-tax - which agency "employer" pays for this ?
Currently, a contract company supplying work can take on a short-term employee if the shareholder/worker is not available for any reason, without interrupting the main work to the end client. If the agency were to be the employer, it would need to take on the temporary worker itself - more complexity.
[I would say, why look for another structure when joint tax returns a la US and IOM would remove the issue and also remove the "unfair" difference between symmetrical and asymmetrical couple earnings - not allowed for by tax credits AFAIK
But this whole issue has only blown up because the Treasury wants more tax revenue from minnows without lobbying power, so fairness is unlikely to be a driver here.]
It seems as though we are trying to fix several problems with one solution. The "problems" are:
1) Taking income from LTD as dividends saves tax to some extent at certain levels. The advantage is getting smaller all the time. Rebecca has mentioned the £40K profit level to make incorporation work, at this level the dividend must therefore be around £30K for a sole trader or £15K for the H&W company. It should be quite simple as Richard suggests to implement "investment income surcharge" to negate the advantage.
2) Employment status (IR35). The answer to 1) above will to a greater extent solve this. Allowable expenses such as travel should be easy to fix where the "contractor" remains in one place or has a limited number of engagements.
3) Income shifting - the tricky one, but if 1) & 2) have been fixed the saving is £7200 max per shift. (I am assuming that the wife's wage is taken as a given). If the investment surcharge is set at a diminishing rate like NIC this would deter a transfer. Say we set the IIS de minimis at £5435 and a 15% charge on dividends of £36K falling to 1% over this. Suddenly shifting income becomes rather less attractive/costly for the treasury. It would however then be a small but brutal step to eliminate the advantage altogether! Let's not call it national insurance though, eh!
On the basis that the new structure would allow two or more people to carry on a business in common I do not see how it can "solve" income shifting anyway. Far better to make the options all relatively tax neutral and leave the choice of "vehicle" to the individuals concerned.
As I said in one of my earlier posts, my preferred option would be to introduce transferable allowances between spouses for EVERYONE, i.e. to include employees. That would make things much fairer as it would benefit the common scenario where one spouse works and the other doesn't. It is unfair that businesses can find a way around this but employees (and pensioners) can't. That would obviously be the ideal scenario and would put income tax in line with IHT and CGT which do allow tax planning within the family, and also other countries which are moving onto the transferable allowance idea.
If that isn't going to happen, then the tax system has to be changed in some way to rid us all of the blatent abuses where income is artificially diverted to spouses. But, at the same time, we need a robust way of measuring the real spousal input and ensuring clarity to avoid stress and uncertainty which is ever more prevailant in the current tax climate. Looking simply at time spent is a nonsense and is far too simplistic. A spouse who has "risked" half their home as security of a bank loan, for example, clearly deserves appropriate recompense in terms of profit share. Taking Richard's idea further (where he suggests say a 10% allowance for admin/management), I would say that a good default position where there is proof that a spouse does bear some risk and does perform some duties, should be say 25% and the "main worker" should be 75%, so that the "main worker" gets three times as much profit share as the non-main worker. If the business wanted to change it to 50:50 then there would have to be some form of "proof" that each spouse were at least full time workers albeit in different ways. Again, not a perfect solution, but a far simpler one that could be much easier to understand and inplement - a simple choice of 25:75 or 50:50.
What I really don't like is yet another legal structure - we already have enough. Let's concentrate on tacling the problem areas and making the tax rules work again within the structures we have,
Rebecca and John both make interesting and very relevant points that I think should make some of the commenters on this post ashamed. And I think this is a problem that arises when you start this from the perspective of tax. I suspect the rationale behind the EDM was not to make life easier for HMRC, but rather for the poor chaps who have to live with uncertainty of tax outome, continually moving goalposts, and complexity and obscurity, but I think an apology is in order from those who have belittled particular forms of business, and hats off to Rebecca and John for pointing this out.
I would like to propose as a start a movement, led by accountants, whose aim is to reclaim the legality and status of tax avoidance from those extremists who would like avoidance and evasion lumped together. Something like "justice for taxpayers"!
Lets be clear, there is nothing wrong with the current set of structures available to businesses (large and small), and there is very little wrong with the people that run those businesses - but there is something very wrong with our tax system.
My comments I fear have been misunderstood. I was not trying to say all IT contractors should be targetted - I was trying to say that it was the manner in which they got their work and were paid that could be the trigger. I quite agree that if an IT consultant negotiated directly with a client and was paid directly by the client, then they probably should be regarded as a "proper" business. What I was trying to say was that where anyone (IT consultant, Interim manager, lorry driver, etc) got work through an agency and continued to be paid via that same agency, i.e. it is the agency that matches client and worker, and who manages the money side of things, then the agency laws of a decade ago which said that the worker couldn't be self employed, and which led to the choice between employment or ltd co, could now be beefed up to remove the ltd co option. So anyone who gets work through an agency and where the agency continues to invoice the end client and then pay the worker, i.e. acts as an intermediary, should be paid under PAYE fully. This already happens in practice - if I go through, say, Hays, to get a consulting job at, say, Lloyds of London, I can either get Hays to pay my ltd co or become a direct employee of Hays (or an approved "umbrella") and pay tax under PAYE. I would have thought this could be a very sensible option for targetting the workers who really have no long term wish to be a proper business but to continue getting short term contracts. Those workers who are "proper" businesses could negotiate directly (as many already do now) to escape the employment/PAYE obligation. Yes, it would really affect the agencies such as Hays, Spring IT, etc., but the entire industry would adapt.
As I have acted for several dozen IT consultants, I have seen the ones who are nothing more than "bums on seats" and others that really are "proper" businesses. It is this agency position that seems to distinguish them very well indeed in the majority of my cases. The ones who always go through Hays and Spring IT never seem to branch out into anything different, who are hourly paid. Compare that to the client I have who negotiated and deals directly with the UK small business service (no agency involved) and a couple who are dealing directly with Reuters & an Italian bank (again no agency), who both engage their own subbies on an hourly rate to supplement their own work and are paid by the contract (i.e. proper risks and rewards).
The umbrella companies have found ways of dealing with holiday pay, sick pay, redundancy, and other employment issues - so would the agencies - whatever the Govt throws at the larger firms, they will always adapt and survive - it is the smaller businesses that don't have the same resources and resilience and who would be badly damaged by badly targetted changes. Leave the real small businesses alone and strike far higher up the food chain!
John,
The Lutheran pastor whose name you had forgotten.
Greg
I have stumbled on this thread for the first time while on my Easter holidays. Crickey, there are some strong comments ere.
Anyhow, I would just like to throw another issue on the table - one which I believe is related but has only been commented on obliquely. Govt needs (one man) companies to provide the mobile expertise that large companies are no longer willing to employ. This ranges from IT consultants to other specialist skills. The economy needs them (small companies) to allow small business the opportunity to grow bigger, by providing the strcture to grow a business. I strongly consider that you need to avoid a "tilt" in the other direction, or you will interfere with healty growth. But most of these people get no employment or other rights. It seems to me unfair to relate a "real" employee with a "self employed" person in terms of what they pay without looking at the other side of the equation, including things like paid holidays and so on. I really don't know how this could be factored in, but I suspect in the interests of fairness it should be.
By the way, without "spouses" there is very little tax benefit in incorporating at less than £40,000 profit (by the time you have paid the accountant that is).
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