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Biggest tax issues small businesses face

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31st Aug 2016
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From Making Tax Digital to corporation tax and capital allowances, small businesses now have to deal with a vast range of changing tax legislation and policy.

Ahead of our live webinar series ‘Practice Excellence Live’ this October, AccountingWEB caught up with FreeAgent’s Emily Coltman and tax editor Rebecca Cave to find out the biggest tax issues for small businesses.

Current issues

In terms of current hot tax topics, the biggest worry facing individual landlords of residential property is the changes to interest deductibility coming in from 6 April 2017, which will be fully in place by 2020.

According to Rebecca Cave corporate landlords are not affected, but individuals with significant residential property portfolios are looking to incorporate or reduce their borrowings.

There is also a surprise late adjustment to Finance Bill 2016 which could mean individual landlords pay income tax at 40% or 45% on sale of property instead of 18% or 28%.

Cave warned: “It’s not too late to lobby MPs about this change, as the Finance Bill 2016 will be discussed in the House of Commons for its report stage on 5 and 6 September.”

Anti-avoidance legislation continues to mount up. The Finance Bill 2016 includes clause 35, which also seeks to impose income tax at 40% or 45% on liquidation proceeds from small companies which would otherwise be charged to CGT at 10% or 20%.

“Nobody really knows in what circumstances this anti-avoidance rule would actually bite, but it supposedly takes effect from 6 April 2016,” Cave said.

The CIOT has drawn up examples, and HMRC has been sending letters to those who enquire with a few basic examples.

The rate of corporation tax is due to reduce in April 2017 from 20% to 19%, but most owners of most small companies are hit by the dividend tax from 6 April 2016.

“Many will be paying this through PAYE now, but if their salary is too low, or the tax is not being deducted through PAYE, a big hit of dividend tax will be payable by 31 Jan 2018. Company owners need to budget for that,” Cave said.

In an ever-shifting tax landscape, Emily Coltman also flagged up that businesses have to beware of changes to tax reliefs. In some cases more tax relief is available, such as the extensions to small business rate relief. In others there is a reduction, such as the scaling-back of employment allowance and its unavailability to director-only limited companies from April 2016, or the increase of tax on dividend income.

“Small business owners and their accountants face the challenge of keeping their footing on shifting sands!” Coltman said.

The next 12-18 months

Looking ahead in the next year to 18 months, Kate Upcraft's PAYE simplification article lists a number of changes in the area of payroll which will generally come into effect in that period.  

One of the biggest changes for employees will be the introduction of the new childcare savings scheme called "tax-free childcare". When tax free childcare comes into effect (it has been delayed several times but is now due to start in 2017), childcare voucher schemes will be blocked for new entrants.

Small businesses will also be hit by another rise in the living wage.

Rebecca Cave said: “If that does happen, I’m not sure if the next increase will apply from April 2017 or October, as the NMW always increases from 1 October.”

The apprenticeship levy comes in from April 2017 and should only be payable by employers with payroll over £3m. Cave added that all employers will have to report and claim an allowance through RTI.

Perhaps the biggest tax change on unincorporated businesses will be the need to change accounting systems in order to report quarterly under Making Tax Digital.

A large amount of education is needed in this area, and it will have a significant impact on accountants, who tend to do more basic bookkeeping for smaller unincorporated businesses.

Companies are not brought in to MTD until 2019 or 2020 - there will be another consultation on companies and MTD later in 2016, Cave added.

Coltman agreed that Making Tax Digital, which is due to start its rollout in April 2018, will be a step change for small business owners and their accountants.

“Should this take effect as outlined in the consultation documents, small businesses will have to keep their records digitally and file much more frequently to HMRC than currently,” Coltman said.

Tax legislation pipeline

By the end of October most of the current tax consultations will have closed, except for Making Tax Digital and partnership taxation, the Finance Act 2016 will be passed and businesses will be waiting for the Autumn Statement.

We don't know when the Autumn Statement will be, but it is likely to be in mid-to-late November. However, there may be more consultations announced before October which could still be live.

On how the new Chancellor will look to improve the tax system, Rebecca Cave said her one wish for a change in the tax system would be to have clear definitions of employee and self-employed which work for tax , NI and employment law.

“This seems to be an impossible nut to crack. It’s something the OTS looked at with their employment status review,” she said. “Merging income tax and National Insurance is something the OTS has suggested, but in reality an alignment of those two taxes is the only possible step down that road.”

Looking further ahead Coltman added that from April 2017 IR35 for consultancy in the public sector will be changing, with the responsibility for IR35 compliance shifting from the consultant to the engager.

“We have to wonder whether this is the precursor to a similar change for all consultants working across the private and public sectors,” she said.

Coltman said she would urge the new Chancellor to work more closely with the Office for Tax Simplification to have new draft tax legislation reviewed and vetted before it is passed into law, rather than the OTS having to unpick complications after the event.

“The vast majority of small business owners find tax far too difficult to understand, despite the best efforts of accountants to explain it, and do not have time to look up rules around, for example, whether they can claim tax relief on every cup of coffee they have while travelling to visit clients.

“As the tax system is long overdue for an overhaul to make it fit for the modern, flexible working environment, the Chancellor may also decide to make specific improvements and issue greater clarification for mobile workers and the self-employed. In particular, guidance around such matters as Christmas parties for director-only limited companies with no other staff, and freelancers working in coffee shops in order to use the free WiFi would be very welcome,” she said.

What do you think are the biggest tax issues for small businesses?

AccountingWEB has launched a free online interactive conference series called Practice Excellence LIVE, with the tax stream delivered in association with FreeAgent. Register now for two tax sessions: The biggest small business tax issues that you need to understand and the tax legislation pipeline - what's around the tax corner.

Replies (2)

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By steve 12321
31st Aug 2016 16:28

Lost for words at the lunacy of it all. No incentives to be self-employed and create jobs. Sucking the life out of businesses etc. Less jobs. Less self-employed. Business tied up in admin and higher taxes. Shocking!

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By johnjenkins
02nd Sep 2016 12:04

As I have said before HMRC are on course to destroy the one man band business (including Accountants). All JC has to do when he gets back as leader of labour is to stand up for the small business and he will win the next general election hands down. Politicians seem to think they can do what they like and we will lie down. Brexit should have taught them a lesson. It appears not.

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