The Office of Tax Simplification (OTS) has used its small company taxation review to call for a series of changes to the tax system to ease the administrative burden felt by micro businesses.
The making tax digital (MTD) plans have added impetus to the OTS’s recommendations to simplify tax, and the OTS has asked to be formally involved in MTD’s development to ensure simplification issues are considered.
Commenting in the review’s forward, OTS chair Angela Knight stressed the burden of tax on the small companies: “Britain’s micro-businesses are spending too much of their time and money sorting out their tax or paying someone to do it for them,” Knight said.
Emerging from the series of discussions the OTS held with 285 small company owners and accountants, the OTS suggested a raft of administrative changes. These include:
- Weekend and evening support from HMRC;
- Simplifying corporation tax;
- And, in a nod towards the MTD plans, aligning filing dates across government departments, suggesting VAT and PAYE, and annual returns and corporation tax.
This last point, they note, could contribute towards HMRC meetings its £400m administrative burden reduction target.
Look through system
After assessing the struggles small companies have with corporation tax, the OTS explored the advantages of a ‘look through’ system: a taxation on shareholders as a solution to low salary/high dividends distortions, where the company’s structure is ignored and the owner is taxed as self-employed. The OTS would like further exploration into this model to see whether it this could offer simplification for the majority who distribute all their profits.
While ‘look through’ garnered a mixed response from the consultation, IPSE foresees this option causing more problems. Commenting on the review, IPSE chief executive Chris Bryce said: “Those who work flexibly need to be able to manage cash flow in their business freely, and so the ability to retain money in the company is essential – something this proposal may restrict.”
The requirement to file accounts according to generally accepted accounting principles (GAAP) proved complicating for micro business. Accountants raised the concern that the accounts they produced were little use to the owner because the owners didn’t understand them.
OTS recommended exploring the possibility of a cash basis of accounting being used for the smallest companies.
Micro businesses’ strained relationship with HMRC was also raised. Some small company owners felt HMRC treated them as potential tax evaders, rather than offering help.
As well as being treated with suspicion, a lot of the owners wished HMRC would provide support outside of working hours.
Also discussed was the need to develop an outline for a new ‘Sole Enterprise Protected Asset’ (SEPA) vehicle, which will give some limited liability protection without the need to formally incorporate.
In a separate report the House of Lords Committee supported the idea of more OTS involvement in easing the complexity of tax for businesses.
Lord Hollick, Chairman of the Committee, said: “We have been very impressed with the work of the Office for Tax Simplification. The government is right to put the OTS on a statutory basis. It should also give them a bigger role in tax policy and the resources to take on that responsibility.”
John Whiting, OTS tax director, said: “We also think that there is promise in new ways of carrying on business and different ways of taxing a company. We need to do more work on these radical ideas and want to hear views on the outlines we have put forward in our report.”