OTS urges tax simplification for micro companies

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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.”

Cash accounting

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.

HMRC relations

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.”

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07th Mar 2016 11:14

Unless I am mistaken

The only 'simplification' has been the collection class 2 NIC's via self assessment: a magnificent achievement after err.....6 years.

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07th Mar 2016 11:39

Weekend and evening support from HMRC

How realistic is weekend and evening support from HMRC, given the cuts in staff/budgets? They barely provide support during office hours as it is.

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07th Mar 2016 12:26

NO. Just NO.

There are many reasons client choose to be a limited company, one of them being the easy ability to retain funds within the business when times are good or when the business needs the funds.

The proposals would mean clients paying 40% or more on money they don't want to take out the business.  At that point, there is no reason not to just close the company down and save all the costs involved and become an LLP or just a sole trader.

This just looks like another back door stealth tax, which I thought Gordon Brown was good at but Osborne has raised to another level entirely with his attacks on interest payments, etc.

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07th Mar 2016 13:45

OTS = Gravy Train

After 6 years (according to memyself) the best idea they can come up with is to request evening and weekend support. I've got news for the OTS. The phone will get answered at present during these times although the waiting times will still be over 30 minutes because, guess what, less staff are employed at these times.

If taxpayers wish to operate with limited liability with the attendant advantages they'll just have to fork out for an accountant who should be able to prepare accounts using accruals accounting.

I lost any faith I might have had in the OTS when they sidestepped giving a proper recommendation on IR35.

 

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.

In defence of the OTS, most of their proposals sensible proposals over the past 6 years have been ignored. 

The "look through" system however sounds naive.  They would hit all the normal IR35 issues about whether something is or is not a 'proper' limited company or if it is 'disguised employment'

The problem is not structure, but the fact different structures are taxed in different ways. By aligning the taxes for self employed/employment/corporate you get rid of the problem. 

Cash accounting might be the only way quarterly reporting will work, but the results are essentially garbage by dropping the basic "matching" principle. 

And finally: since when can you not call HMRC on a saturday? They do 8am to 4pm on the SA helpline which is the main thing an unrepresented tax payer would be calling.  I think the VAT one is shut, but given all they do is read out something at random which may or may not be relevant is hardly any loss.

 

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By Briar
07th Mar 2016 16:49

Let's get back to the Imputation System

The Imputation System was devised after much worthy discussion in the early 1970s. Chancellors since then have ignored (or simply do not understand) the original concepts - that it is the individual who pays tax - companies pay tax in advance for those individuals who own the companies (hence (what was) the tax credits). The OTS are now suggesting that the imputation system should be reversed but the rationales change as a result.

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07th Mar 2016 22:56

I'm happy to spend years making well meaning reports that are pretty much ignored - OTS, where do I sign?

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08th Mar 2016 09:05

Progress made

Lets not criticise OTS now as they have abolished the 15p per day of Luncheon Vouchers that were tax free and no more tax relief on a horse.

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By cfield
12th Mar 2016 20:37

Back to the future

Sounds like close company apportionments to me. Taxing companies on their retained profits. One of the evils of the 1970s. Back to the future I think.

I just wish politicians would stop interfering all the time. Their constant meddling in the name of simplification or so-called level playing fields just makes things worse. People are thoroughly confused these days, and that's because the Government keeps moving the goalposts, not because they don't understand accounts.

Is it really such a huge problem if small businesses don't understand accruals accounting? Actually, most seem to understand it better than politicians think. Maybe they shouldn't judge other people by their own level of business sense.

For instance, I don't think many entrepreneurs think they've made a loss just because they haven't sold all their stock. Most know instinctively that stock is future profit. I don't think the architects of cash accounting do though.

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