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 su

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Sour grapes

IANTO | | Permalink

I have to say gentlemen and ladies, that there is an element of sour grapes in your attitude. IT consultancies are being targeted by HMRC and there is collateral tagetting of other SME’s. Those other SME’s believe they are being targeted unfairly and that HMRC should only concentrate on IT consultancies. Whatever happened to the adage of “live and let live”. When IR35 was brought in the FSB was disinterested in the issue as they believed it did not affect their membership adversely. However, the “family business tax” has the potential to affect many of their membership and so they have now woken up to the threat. To paraphrase a well know saying (I can’t remember the exact text and who said it), when the state came for Mr. A. I didn’t speak up. When the state came for Mr. B. again I said nothing. Now the state comes for me and there is no one left to speak for me!

It’s the same old story, divide and rule! So let’s not talk about suggestions to solve a perceived problem. Let’s just oppose HMRC as a matter of course in any and all attacks on business and individuals. In closing, I will argue with any of you that an IT consultancy is a genuine business and should be treated as so.

Genuine businesses

IANTO | | Permalink

So let's examine the contention that IT consultancies are not "genuine" businesses. Generally, I don’t think the average partnership, sole trader or “genuine” small business has to conduct their business in the way that IT consultants do. Many IT consultants work many miles from home and can stay away for long periods. I don’t think this is typical of SME’s in general. Responsible IT consultants take out third party indemnity insurance, and also professional liability insurance. Granted I can see that some sole traders and “genuine” businesses would do the same, so why does that make an IT consultancy not a “genuine” business when generally the same insurance structure is employed? IT consultancies are legally liable to provide the same employment benefits as other SME’s. So one again I ask what makes an IT consultancy so different that it cannot be judged a “genuine” business. If a consultant earns all the income of the company and employs a completely unrelated individual to help with the admin, how is this different from any other SME? It is claimed that there is no financial business risk. However, I personally know several IT consultants whose agencies have gone bust owing as much as £10000 to these individuals. No financial risk? I think not? What sole trader would be likely to face such a debt? As directors of their limited companies, consultants are legally liable for the debts of that company. Is this the same for partnerships and sole traders? Even if it is, it demonstrates once again that an IT consultancy is no different in law or in essence to any other SME, and should therefore enjoy the benefits of such .

Employment rights

IANTO | | Permalink

It is clear that many of the posters on this forum and specifically the Government, do not view IT consultants as "genuine" businesses. Clearly the recent spate of legislation was meant to target IT consultants, but because targetting of specific groups for taxation purposes is illegal under EU law, the legislation has to be drawn widely and this is why "genuine" businesses are also caught in the net.

Clearly there are mixed views about this issue. But let's take one recent suggestion that all those who obtain work through agencies should be employed by those agencies. This clearly is not what the agencies or the industry demands. Neither the clients nor the agencies want responsibility for employment rights and the current structure allows both to evade their employment responsibilities by demanding that IT consultants trade as limited companies. This situation is not of the making of IT consultants, it is forced on them.

Surely, there's more

AnonymousUser | | Permalink

Whilst the comments here are all worthy of further consideration, no one appears to have addressed the issue of whether it is not really a case of a needing a vehicle better suited to the small enterprise but, rather, needing a small enterprise better suited to the vehicle.

The core of the small business to which we are referring is not really, in my opinion, businesses in any proper sense but a glorified employment run by people who are, by their nature, employees.

Many of the Geoff Jones of the world have only ever come to be in their position because of the employment laws we have. I would posit that many of the service providers and freelancers would be better off with an employment by a large employer (if only they could get such an employment).

A large number of our so called small businesses are ill equipped to operate as such. We are one of the few countries which permits instant off the shelf company purchases (not even Richard Murphy's much loved CIs allow this). Further, we have no minimum capitalisation requirement nor a test of competency for company officers (would it be so wrong to have the equivalent of a driving test before people be allowed to operate a legal entity with limited liability ?)

I fear that, whatever the vehicle, without first addressing the suitability of the user, there will never be a satisfactory answer.

Tax

AnonymousUser | | Permalink

Richard - did you misread me?

I didn't say eliminate VAT, I said reserve it for policy. eg 50% VAT on a Porsche.

As for NICs on pensioners, yes their tax rates would go up - but you counter that by increasing their personal allowances by a large amount. Yes, rich pensioners might end up paying more tax, but they can afford it, right? Otherwise, where's the argument for a higher rate band at all?

There's no reason at all why the overall effect of simplifying the tax system should not be tax neutral. Where you lose tax take, you get back by increasing the tax rates. And where you want to focus policy, use the personal allowances / VAT rates.

As to what's a family, yes, quite. But allowing a choice of being taxed as a unit would be remarkably family friendly - which all breeds of politician seem terribly keen to emphasise in their propaganda. And if there's an overall cost, smear it out across the rest of the population by increasing the tax rate.

Greg

Who are the problems?

Ken Howard | | Permalink

How about looking at this a different way? Rather than potentially drag all small H&W businesses into another legal minefield, not to mention all the admin and bureacracy (and cost) of enforced movement away from ltd cos to a new entity, why not just look in general terms at where the alleged abuses are the worst.

Given that HMRC have tried and failed to use IR35 and S660, it is clear that they think it is contractors and consultants and interim managers that are the ones abusing the system. It is these where "personal services" really are of the main fee earner and a spousal involvement will be limited. Current rules give such workers a choice of Ltd co or direct employee of the agency, so surely, the answer is just to remove the option of the ltd co. Govt have already stopped the managed service company "abuse", so why can't they make a law that says all temps/consultants/managers etc that obtain work through an agency and are paid by that agency have to be employees of the agency. How simple is that.

Majority of problem solved, most real H&W businesses are left alone. What is wrong with that? Except of course the IT consultants would whinge, but that is a very small part of the entire small business community and they are likely to be higher earners anyway than the average shop or trademan.

richard.murphy's picture

Lots of problems in there

richard.murphy | | Permalink

Greg

I gear you're being over-ambitious here

1) What is a family? Hard to tell with some people I know!

2) Abolish NICs and you increase the tax on all pensioners, which is not a vote winner

3) VAT raises over £70 billion a year - what are you going to stop spending on to raise that? The Tories can't find any cuts right now, remember.

I could go on, but I think you're leaving the topic, and what is possible

But I'm aware some think I might be too

Richard

Just not his solution...

AnonymousUser | | Permalink

Mornin Richard.

Not entirely sure what you think my solution is, as so far I've really only pointed to the problem being a tax issue first, as compared with your assertion that it is fundamentally a legal structure issue which can be resolved with yet more legalese. Here we do fundamentally disagree.

My suggestion is that we eliminate the arbitrage opportunity and I favour simplicity over increasing complexity.

There are many ways to achieve the first, remarkably few ways the second. I favour simplicity, and we might as well make an argument of it, so here goes..

Here's a few things I'd try:

1. Equalize all the tax rates whether capital or revenue, corporation or personal, eliminate NICs, reserve VAT and personal allowances as instruments of policy.

2. Legislate that any legal structure is transparent for the purposes of taxation as an overriding anti-avoidance measure.

(So remove the unearned / earned income distinction, give full credit for corporation taxes paid and allow a full reclaim of taxes suffered on dividends)

3. Taxation on the basis of family "economic units" rather than individuals - which is the reality the divorce courts seem to recognize, and which the benefits system allegedly seeks to understand before it hands out benefits.

(One way of effecting that would be freely transferable personal allowances between members of the "economic unit" and scaling of the rate bands to reflect the total income of the unit)

(I did have a 4, but taking the health fascists outside and shooting them didn't quite suit the topic.)

Cheers,

Greg.

Thanks

Anonymous | | Permalink

Thanks for all the comments

In no particular order, Nichola, just an EDM, no doubt, but also a serious proposal, with some serious backing.

And Nichola, you're right - absolutely right - "if one could not trade through a Limited company anymore because income shifting legislation did not allow it, then IR35 and the managed service company legislation would become redundant". That's part of my objective. Let's get rid of as much anti-avoidance legislation as possible by getting rid of the reason for tax arbitrage altogether.

Which of course means that I agree with Green Heys - just not his solution. The differential will remain unless we reform the vehicle too, I suspect, although I'm pleased to see that Jonathan and I agree on the additional tax charge on investment income - but I see that as additional (because it will stop a lot of other abuse as well).

So, I think there's much more agreement here than I expected.

Except from Ken, and I'm afraid he's simply making a false assumption, which is that I know nothing about small business. I am a practitioner still, and in my past headed an 800 client SME practice, with more than enough of the type of business we're talking about here to know that a) they don't sue b) many accountants do incorporate clients for short sighted reasons, including fee generation and inappropriate tax savings c) I can spot an income splitting arrangement from a mile off, and can justify just about any reasonable split with ease in much, much less time than it takes to prepare a CT return, P35, dividend vouchers and all the other paraphernalia of incorporation.

So this is not just academic think Ken, it's the thought of a person who has been there and done the real thing and wants to a)reduce small business burdens b) create a level playing field on which they compete c) get rid of a load of anti-avoidance legislation d) balance tax burdens appropriately. What's wrong with that?

Only an EDM

Anonymous | | Permalink

Quite right, only an EDM. I have not seen such an emotionally charged debate since...well, IR35...

This has got me wondering, if one could not trade through a Limited company anymore because income shifting legislation did not allow it, then IR35 and the managed service company legislation would become redundant.

That might be some sort of vote winner I suppose!

Oh my god...

joncape666 | | Permalink

...nothing embarrasses quite like a nerdy-bitchfight does it? Stop getting so excited everyone, it's only an early day motion!

Richard - why get so complicated, the idea of a tax on dividend income over 5k equal to nic for self employed has enormous merit, the rest is way too much, sledgehammer to crack a nut stuff.

Tax is the point

AnonymousUser | | Permalink

But Richard...

The differential in effective tax rates creates the arbitrage opportunity that drives incorporation, dividends to spouses etc.

Equalize the taxes, and the whole argument goes away. Can't we just simplify instead of creating more legal gumf?

Greg.

listerramjet's picture

tut tut Richard

listerramjet | | Permalink

Should I be surprised that you suggest that paying a dividend is tax abuse? I think that demonstrates just how absurd your position is. Equally absurd is your notion of valuing the input of specific employees in order to justify their reward. Almost as spectacularly nonsensical as the thinking inside HMRC.

Richard, do you actually have real life experience of the smalle

Ken Howard | | Permalink

Richard, I think that you would make a great HMRC inspector as you come out with the same kind of academic ideas that suggest a lot of thinking and not a great deal of actually dealing with the real life situations. I wish to address just two of your points.

Firstly, you criticise accountants for advocating limited companies by implying that because there is more work to do, therefore higher accountancy fees, such is the only real reason for accountants encouraging incorporation. There are many reasons why you are wrong. As I have already said, many businesses incorporate because they have to - i.e. contractors working through agencies have no other business vehicle. From a personal point of view having worked with the smallest of businesses for 25 years, many clients have created their own limited company and started trading before they even contact us, so we have to deal with their situation as it is presented to us. Again, from a personal point of view, I always give clients a real choice of business structure and actually prefer clients to choose unincorporated so that it saves a lot of hassle. So please don't tar everyone with the same brush - there may be "some" accountants who encourage incorporation to charge more fees, but many don't - I've worked in six practices with the smallest of clients, and I can say without doubt that our fees were never a factor. We have to give clients the choice - if we didn't they'd sue us.

Secondly, re accountancy fees. You have shot yourself in the foot in this topic I'm afraid. On the one hand you are criticising accountants for not being able to properly value the input of a spouse - suggesting all sorts of ways to do so, i.e. counting telephone calls, time logs, etc., which are of course all very logical from an academic point of view, though sadly completely impractical for the smallest clients with scarce resources. Then on the other hand, you criticise accountants for preferring incorporation due to the ability to charge more. BUT, surely, if you want accountants to value the input of a spouse in a business, obtaining and evaluating all the raw data you suggest would take an accountant some time - so the accountant would have to charge more! So following your suggestions, not only would the smallest business have to keep records of phone calls and time sheets etc as a minimum and probably a lot more, they also have to pay their accountant to work through it all and come up with a figure for the spouse's worth to the business, so it costs both time and money! It is not that accountants can't value the spouse's input, it is just not practical to do so - who pays the accountant?

richard.murphy's picture

Spouse transfers

richard.murphy | | Permalink

Ken

Re your second post, as I have mentioned here - http://www.taxresearch.org.uk/Blog/2008/03/19/are-accountants-really-so-incapable/#comment-401533 - I think there should be mandatory right for a spouse to be paid a reward from a joint enterprise. That's clear recognition on my part of all you say.

But I think the payment should also reflect real input. I suggest a starting point formula (I stress: I suggest one, it may not be the right one) and then say that of course anyone can provide evidence for a different ratio to apply.

There's no such system now. In that case isn't what I am suggesting an improvment on the current situation?

If not, why not, and how can it be improved within the constraint that the governemnt is clearly opposed to income shifting and anything suggested does have to live within that fact?

Richard

richard.murphy's picture

Reply to Ken (1)

richard.murphy | | Permalink

I'll reply to your two posts separately.

Of course I agree with you that if my proposal is to work LLPs have to be accepted as valid contracting agents where limited companies are used now.

I agree with you, it's been absurd that limited companies have been forced upon people who do not need them, and I'd like to reduce the admin burden that has resulted.

I'd like people to have the freedom of self employment - and running a small limited comapny does not really give that. LLPs do. You can take your money when you like. You can only pay tax on what you've really earned. There are no benefit in kind rules, no dividends to record and account for, no manangement accounts needed to prove they can be paid, no corporation tax return, and on and on.

They do, for the government have the advantage of ensuring registration of a business takes place and full accounts have to be submitted (which I accept is a cost a business without limited liability does not have - but it's an insurance premium I willingly pay).

It's a compromise - but it seems like an excellent one to me. The self employed win real freedom - enough to make up in earnings all the cost of the admin hassle of the company, I suggest. Again, that feels like that to me as a person who runs an LLP from choice. The government solves the massive problem small limited companies cause it.

Yes it will require 'joined up thinking' but it's clear the government are open to listening - why else did they abandon the income shifting rules they put forward? I think it's safe to presume they're dead. There is room for a compromise, and a better deal now.

I'm not saying for a moment my idea is the only viable one. But I do think we should be looking for improvment on a broad basis, not just a tinkering with the tax system alone which can only add complication and probably in the long run provide more opprtunity for abuse. Doesn't that make sense?

Richard

richard.murphy's picture

Reply to Greg

richard.murphy | | Permalink

Greg

Limited companies allow earned income - that which for tax purposes is subject to NIC - to be turned into unearned income - that which is not subject to NIC - bu way of payment of reward as dividend.

Limited companies are therefore key to the absue that concerns you.

My proposal is designed to limit the opprtunity for this abuse (and if a tax equivalent to NIC were charged on invetsment income of more than £5,000 a year (pensioners and the disabled apart)) to eliminate it altogether.

Using an LLP is a key first stage to this. It would create a level playing field as a result, where all self employed people could compete without tax being a factor in favour of one or another, or a distortion between the employed and self employed.

Better economic decision making could result.

The tax raised might be used to cut tax for all. Tax raising need not be the point of this exercise (and I am neutral on the point). Tax neutrality, and the fact that the structure I propose would significantly cut the admin burdens on business now forced by the tax system and their accountants to use limited companies which have the highest admin burden of all the oiptions available to them, is the point of my proposal.

As such I think we're much more in accord than you think.

Richard

richard.murphy's picture

A summary to muse on (1)

richard.murphy | | Permalink

Can I summarise what I have actually recommended since I think this might help?:

a) That Limited companies have a minimum capital requirement - at least £10,000, maybe more. This means they will not appeal to many of the small enterprises where income shifting is a problem. They will still be available to those who need to commit capital to their enterprise and they will keep the tax rates that are designed with that intention in mind - which I hope deals with Mark's point on this issue. This limit may need to increase over time. This is EU consistent as far as I can see.

b) Those who do not meet this requirement, or do not want to should be re-registered as LLPs. This does not remove their liability risk. I am well aware that CGT transitional relief will be needed. This will be a cost to HMRC. Can we complain at that?

c) An LLP will not be compulsory. An unlimited partnership could still be used (although why people do that when an LLP is available beats me). The income shifting rules would apply to partnerships though. After all, their tax rules are the same.

d) An LLP could pay a reward for capital contributed to whoever provides it, including a risk premium. That would be fair. I have suggested a simple method of calculation.

e) If it is apparent (and it always is when this is true) that one party is the main income earner in the LLP then their spouse / civil partner / cohabitee could earn a de minimis profit share for the sort of support Emily has referred to - even though this puts them in a wholly unfair situation when compared with employees, where the same practice is, I am sure, commonplace.

f) Reward should then be calculated by default on contribution - and I have given indicators as to how this might be assessed. Not all need be used, other may be much more appropriate (I'm not being prescriptive here - I am just showing these things are possible).

Mark Lee - Explanation please

Anonymous | | Permalink

You made reference to a technical tax avoidance device with which I am unfamiliar:

an "Eastenders analogy"

Would you be kind enough to explain this - is it perhaps some kind of Sharia compliant financing arrangement to avoid SDLT?

Many thanks

Another entity?

MikeBellisimo | | Permalink

At the heart of all this is a philosophy issue.

NuLaba want to apply different types of taxation to different types of Businesses.

It started with IR35 where they attempted to define some businesses as tax avoidance vehicles. They then moved on to create a non-legal definition of a PSC. They then moved on to create another non-legal definition of an MSC and MSCP. Now they are going after Unbrellas and trying to redefine them. There is also of course CIS.

The problem is that all these definitions that they are trying to apply do not fit. In law all are just different Ltd Cos.

The Government seem to wish to create a legal entity where the tax take is almost identical to that of an employee but the benefits liabilities and employment rights liabilities are zero.

The problem to date has consistently been that they cannot come up with a definitive legal definition of why one business should be taxed in a different way from another business. They seem to want instead to live in the land where "I know it when I see it" is what rules the tax legislation.

How can they honestly expect to legislate that certain trades may only be conducted through certain legal vehicles or to determine that whilst an individual or a consortium of 2-4 (say) people could not set up a Ltd Co to sell consulting services but that a Clap Geminy or whoever can do so.

For many trades it is not possible to work as a Sole Trader because clients carry risk for employers NI. All attempts from IR35 onwards have sought to move the risk for employers NI onto the service provider regardless of the logic of the situation simply because the provider is the weakest link.

I'm personally involved with 3 different types of business under one Ltd Co. Would I be required to create separate legal entities for each revenue stream just because I don't employ enough people?

New legal structure for SME's

IANTO | | Permalink

I think the point that everone is missing here is that HMRC are only interested in increasing the tax take from SME's and is not in the slightest bit interested in "fairness". With that in mind, I cannot see any Government support for any structure which does not achieve this end. I've said before, "fairness" is only an issue with HMRC when it increases the tax take. Any other issue is ignored.

listerramjet's picture

bah humbug

listerramjet | | Permalink

Richard, what is wrong with your suggestion is that you are using an artificial device to solve a perceived tax problem, I think because you miss the point. People that run a business are not equivalent to salaried employees, but you seem to be assuming that they are. The perceived tax problem is that the tax rules that apply to limited companies are in some way not fair on salaried employees.

Taking your suggestion that limited companies have a minimum capital requirement of at least £10K, I am wondering why you think this makes any sense, apart from in the context of being an artificial device to further your tax aims? What other problems does it solve?

richard.murphy's picture

A summary to muse on (2)

richard.murphy | | Permalink

g) If this gives rise to a result the partners don't like it's up to them to establish the rationale for a different reward ratio - and to evidence it. For example, if a great idea is being paid for, it would have to be shown that the idea resulted in an increased profit with no greater effort expended. Then it could be justified. This is not hard to do if it is accepted that precision is not possible (and I have always found an understanding of that in my career in tax investigations).

h) The result is a big saving in admin time and effort. No PAYE, no benefit in kind hassle, take money when you want, no CT returns, easier accounting for expenses, and on and on and on. A massive cut in accountancy fees. Is that why the profession does not like this, I wonder?

i) Yes, all profit will be taxed at marginal rates of income tax. Most will be at 20% then, lower than the planned small company CT rate, because that's what most self employed people pay. And as is obvious, most limited companies also distribute all their profit, so this is the case now as well. And it's true NIC will be paid at self employed rates. But these are lower than for an employee, so there is still an advantage to being self employed, but the massive distortion that exists now will be removed, which will be a benefit to good market based (rather than tax driven) decision making.

So, tax is paid more fairly, business can be managed much more flexibly with easily changed reward ratios and vastly reduced admin, and even a guarantee that some income shifting is acceptable.

I know accountants hate tax. But isn't this fairer than now? Easier than now? Less admin for most businesses than now? Much less hassle than what HMRC proposed?

Seriously, it may be flawed, but where are the flaws for the vast majority of small businesses who could win from this bar some additional NIC payment (which the government is clearly intent on getting somehow or other)?. Isn't this a viable working compromise? And if not, why not? I'm still struggling to see why it isn't for most clients of most accountants, bar the fact that the accountant will, I know, make less from this arrangement.

Spouse contribution

Ken Howard | | Permalink

Richard, I am afraid you are completely wrong in your assertion that a spouse's role is similar whether the working spouse is employed or self employed. This is just another stereotype argument. Of course, there will be cases, (perhaps a lot of cases) where a spouse takes a wage and a profit share that is wholly injustified - but do we really know that it is such a problem to cause unnecessary stress and hassle to ALL small businesses? I think the proposed solution is out of proportion to the perceived problem. Time and time again, I see clients where the wife makes a massive contribution - in many cases the husband simply wouldn't be in business at all without the wife behind him to deal with the support and management needed - how on earth can you prove and quantity that to people (like yourself and HMRC) who are blinkered and assume that the wife is doing nothing more than answering the phone occasionally and filing her nails?

A wife of an employee will probably know very little about her hubbies job (other than office gossip) and certainly won't actually provide any worthwhile input. Hubbies contract of employment would usually include a confidentiality clause prventing them from talking about work in the first place, and anyway, most employers will have plenty of support within their organisation - hubbie can talk to colleagues about a problem for example.

In a self employment situation, the wife typically takes on multiple roles, i.e. administration, PA, human resources, health & safety, management, accounts, procurement, credit control, etc. A market-rate for someone with all those skills would be far above minimum wage - I see that some PAs can earn £25k to £75k per year. If the hubbie had to do all this himself, he'd work far less hours and so earn far less. I would say that a wife doing this kind of work, thus enabling hubbie to work more hours and earn more money, IS WORTH her hubbies hourly rate - he simply wouldn't earn it if he had to do it himself.

The Govt would be better forgetting about spousal transfers - in fact, to make things fairer, they should introduce transfers of allowances between spouses without delay to create a more even playing field.

Taxes, distortions and economics

AnonymousUser | | Permalink

I thought the point of the tax system was firstly to raise revenue, and secondly to encourage the kind of behaviour that the politicians of the day consider appropriate.

There is also the notion that a tax system should tax people in equivalent circumstances equally, and that those who can afford more should contribute more.

So why do we have a system where NICs can be avoided entirely by becoming a consultant, incorporating your business, taking the personal allowance as salary and then paying out a very large dividend?

That suggests to me that it is not the various legal forms of business entities but the tax system itself which requires reform. Adding yet another structure will merely complicate an already daft system.

Please can we have a tax system that makes sense before we start mucking about with entity legal structures?

(And please start by abolishing NICs, use the tax rates to raise revenue, and personal allowances / VAT to target benefits & policy. (50% VAT on a Porsche would concentrate a few minds.))

Ta.

Joined-Up Thinking ?

Ken Howard | | Permalink

It's all well and good pontificating about different and new types of business structure, but will the Govt make the necessary changes to their legislation in other areas. Take personal service companies. A vast number of personal service company owners never wanted to be a company in the first place - they were self employed as sole traders, paying their tax and NIC on profits quite happily for years. The come along the Govt with the new Agency law and all of a sudden, agencies couldn't pay sole traders anymore, so the workers had to be either employed on the payroll or private limited companies - for obvious reasons, most became private limited companies. Did the Govt really not think that would happen? Are they really so stupid? Then comes along Gordon's 10% CT rate and his 0% CT rate - so what happens? Even more businesses become private limited companies. Again, are the Govt really so stupid as to not think that would happen. If the Govt are annoyed that so many self employed are operating though private limited companies, then they only have themselves to blame. A lot of self employed would love to escape the bureacracy of a ltd co but can't because of either the agency laws or the tax traps of disincorporation. IR35 is ridiculous as it doesn't leave anything in the kitty for the company to grow out of agency contracting and onto "proper" business - the idea of a ltd co having to pay its owners fully via PAYE is also crazy as it doubles up on the NIC with employers NIC - so they'd actually pay more NIC than they would as a sole trader or partnership.

If there was genuine commitment from HMRC and Govt to find a real solution - not their usual idea of just changing it so their tax intake increases, then I am sure a lot of people would be interested. Likewise if there was genuine commitment from them to consult and LISTEN to what accountants and small business owners tell them.

If you go back more than 10 years, there were far fewer limited companies - the Labour govt have stripped away most of the extra costs and bureacracy, encouraged incorporation via low taxes, and forced some into incorporation with the agency act - now they're bellyaching that a lot of businesses have incorporated. Are they really stupid? How about they just leave things alone for a few years, let the dust settle, and TALK to those who really know what is needed - i.e. the smallest businesses and their advisers (i.e. micro businesses of under 5 employees).

Different restrictions

mikewhit | | Permalink

Regarding LLPs versus Limited Companies, there are restrictions on who may be a Member of an LLP (bankruptcy, DTI disqualification), whereas those same restrictions do not apply to being a minority shareholder in a Ltd Co.

Incidentally, Richard has stated on his site that those restricted people should not be in business anyway ... can't help thinking of that recent programme on which the taxi driver was erroneously made bankrupt by HMRC.

listerramjet's picture

Emily

listerramjet | | Permalink

why should a business be restricted to a sub set of the available structures just because it is by some measures small?

dialm4accounts's picture

Why not a LLP?

dialm4accounts | | Permalink

OK folks - time out.

The issue here isn't whether or not Richard Murphy is arrogant. It's whether we need a new legal entity to solve the problems inherent in small business taxation.

My personal view is that there are some factors that can't be quantified. You simply can't put a value on, for example, the support one spouse gives to another when a business is being set up or run.

I see nothing wrong with using the existing LLP framework for small businesses, and taxing the profits of the partnership instead of the money taken out by each partner. What are other people's views on this?

Apparently...

AnonymousUser | | Permalink

...Richard Murphy does not see that his loud claim that he is not arrogant actually proves that he is.

listerramjet's picture

Richard

listerramjet | | Permalink

I will stand up and be counted in support of your right to comment - my point was simply that you are not a law maker.

I believe your comments on your blog, and referred to in your posts here, are extreme and your arrogance stems from the fact that you do not seem to accept that there are valid points of view that differ from yours.

I wonder how far you would go to support my rights to hold such a view?

richard.murphy's picture

Arrogant?

richard.murphy | | Permalink

I'm sorry, but I rebut the suggestion completely.

I have made suggestion that has been taken up in parliament by members from all main parties for a reform of the law with regard to small businesses that would solve many of the problems that they currently face, reduce their admin burdens and create a level playing field for most who particiapte in that market and I'm then called extreme.

Is it arrogant to respond to such an absurd suggestion? I don't think so. I'm just trying to have a reasoned debate. I'm pleased Mark Lee has responded to it.

richard.murphy's picture

Mark

richard.murphy | | Permalink

I address the issues you raise in my paper, available here. http://www.taxresearch.org.uk/Blog/2007/08/09/arctic-systems-moving-small-business-taxation-on-in-the-uk/

The transition is not as hard as you think; all that is needed exists. But we will need to restrict access to limited comapnies, a move easily achieved by simply raising the minimum capital requirement. EU law allows that.

That's quick, easy, and achievable in remarkably short order. No new entity is needed at all.

And nor would it be compulsory to use an LLP - given that the tax status of this will be the same as a partnership either could be covered by the same rules, without problem. It's limited companies that are the problem in that they create the capacity to convert earned income into investment income.

Richard

It may be debatable...

AnonymousUser | | Permalink

...whether Richard Murphy's views are extreme or not but there can be no question about his extreme arrogance and the extreme offensiveness of the tone of his comments.

There can really be no excuse for his abuse of Nicola Ross Martin who is surely entitled to and may even be justified in her view that Murphy's views are extreme.

richard.murphy's picture

Can we move on from this nonsense and discuss the issue?

richard.murphy | | Permalink

There are some quite extraordinary comments here.

Alistair seems quite sure that I may not comment on these issues (which is all I have done) when quite clearly reserving his own right, and that of the profession who shares his opinion, to do so. Why, might I ask, is there one rule for the tax avoiding profession and another for the tax complaint profession? Can he explain why this is the case, in his opinion? And can he also tell me who made the rule that I may not comment?

And Nichola continues to put forward the quite absurd notion that accountants should not be asked to measure 'commercial input' into a process. If we don't do that can I ask what we are for? Is a little commercial measurement now beyond our capabilities?

I really do think that it's time for both to engage with the arguments, and not just offer excuses for not doing so.

listerramjet's picture

Richard

listerramjet | | Permalink

it is a shame that you can't see that the nonsense is yours! Surely you accept that it is not your place to offer "a variation on the same rule", and I wonder who is placed to interpret whether specific payroll costs pass the wholly and exclusively rule - ultimately that is the courts - certainly it is not you. Is is also somewhat extreme to suggest that accountants are a barrier to business simplification. By any measure government, and in this case HMRC are the barrier. Accountants are crying foul because of the unworkability of the proposals - that hardly makes them a barrier.

OK

Anonymous | | Permalink

Its fine to have different points of view, but you are still stuck attempting to measure "commercial input" as if we are all widget makers and can be paid per widget per minute or whatever.

richard.murphy's picture

What complete nonsense

richard.murphy | | Permalink

Nichola

You really do offer us some nonsense.

The wholly and exclusively rule disallows tax relief on expenses not for business purposes. A variation on the same rule could deem rewards paid from small enterprises not justified by commercial input to be the income of another participant. It's no different, after all, from disallowing a salary as a deduction which adds to an entities tax burden as a consequnce.

The truth is I also want business simplification - and I know we can have it. The obstacle in the way are accountants who are making excuses to defend tax avoidance. That is not just extreme, it's profoundly anti-social.

As for a test to determine likley apportionment, it would not be hard to establish. I've explored this at http://www.taxresearch.org.uk/Blog/2008/03/19/are-accountants-really-so-incapable/

Now please can we debate the real issue, and not be presented with lame excuses?

Richard

Extreme

Anonymous | | Permalink

Richard, I think that is quite fair to say that your views on this are extreme; most people are asking for less regulation not more.

As George Bull notes, to produce successful rules you have to tackle the problem of trying to draft out a piece of legislation that gives a formula (or what ever is needed) to cost out your spouse or business partner's input. You simply can't do it, and even if you could in the UK it would break down under EU law.

listerramjet's picture

but

listerramjet | | Permalink

what is the problem that this is trying to solve, and in what way is the selection of organisational entities currently available deficient? Surely that MPs might wish to muddy the water in this way is the cause of many of our problems rather than the solution.

Richard kind of catches the income shifting problem when he talks about not everyone being able to benefit, but surely the answer is to widen the net rather than to close it - to which end transferable personal allowances (at least between spouses) would be a good step forward.

If Darling was to be honest then the problem is not about income shifting per se, but rather about increasing the tax take.

richard.murphy's picture

Extreme?

richard.murphy | | Permalink

Is an LLP extreme?

Is people paying NIC extreme?

Is a measure supported by Conservative, Lib Dem and Labour MPs extreme?

Is letting many small businesses trapped in the limited company structure by exit capital gains charges out of that constraint extreme?

Is suggesting a structure that frees most small businesses from separate corporation tax returns, PAYE and benefit in kind charges and which would therefore massively simplify their accounting extreme?

Are you sure you meant I was extreme?

It's a strange description to make of a genuine attempt to deregulate business, bring it into the 21st century and to remove the tax anomalies that some can and others can't expolit, so providing an unlevel playing field and unfair competition.

Richard Murphy

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