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New Legal Entities by Simon Sweetman

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18th Apr 2008
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Everybody has been getting very passionate about a review of small business taxation which may or may not have been revived by the Budget.

So here we go again, looking for the needle of fairness in the haystack of taxation. Is it too much to wonder whether the search for the “New Legal Entity” is akin to the search for the Philosophers’ Stone? It would be most excellent if we could find it and it would solve all our problems, but perhaps - just perhaps – it is not there to be found or invented. The alchemists did spend a lot of time looking, but never found it. That might be because the New Legal Entity needs to be immensely flexible so as to accommodate the curious assortment of things that small businesses do, and the various ways they do them, but at the same time to be capable of being tied down so that its tax position is clear. One might also add that Occam’s Razor requires that we do not multiply entities unnecessarily…so let’s not look for a new toy here.

In any case it is not obvious that restricting the choices of form for those who want to go into business is a good thing. After all, the choice may not be driven by tax, but by your customers or by the wish to limit your liability.

Importantly, the great majority of small businesses – nearly 3 million of them - are sole traders. They are sole traders – like I am – because it keeps it simple, and because if you are in a business where there is no great need for capital investment the protection offered by limited liability would be irrelevant. And because they are not getting anywhere near the 40% tax band. Any proposed solution must not muck up this situation.

HMRC believes that there are two major problems. First of all there is the transmogrification of earned into unearned income, something which is mainly done to avoid NIC and which has been exacerbated by the practice under this government of increasing NIC rather than income tax. There have been no proposals to do anything about that.

Secondly of course comes income shifting: HMRC believes this is a problem and has so far been unable to come up with a solution.

We can add to that the imperative to reduce administrative burdens for small business. It might be argued that some – by opting for a corporate structure – actually choose complexity.

But I think there is no big bang solution here. The only answer is chipping away at it, dull and not at all sexy. Oh, and trying to stop the Treasury loading new burdens on at the other end.

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Replies (8)

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By Simon Sweetman
25th Apr 2008 18:50

transmogrification
means to change into a different shape or form, especially one that is fantastic or bizarre....

...and it might be worth noting that this is NOT Gordon Brwon's idea - it comes, strangely enough, from the back benches.

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By User deleted
25th Apr 2008 18:05

complications
more money squeezed out through complications

and of course, the more complications in the system, the more "loopholes" there will inevitably be, which will mean that the Treasury will need to add further complications to fix the loopholes, thus generating more loopholes ....

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By davidrobinson0308
24th Apr 2008 09:12

Transmogrification
What is transmogrification?

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By IANTO
22nd Apr 2008 11:54

The root cause of the problem
Has nothing to do with legal entities nor the tax system. This Government is essentially bankrupt and Gordon Brown, forgive me if I ignore Darling, is looking down the side of the setee for loose change.

Brown is close to becoming a despot. He robbed me of a handsome pension fund in his first budget and he has robbed the general populace ever since. Unbelievably for a Labour Government, he is now robbing the poorer paid to placate the middle income earners who it's said put Labour in power in 1997.

The money raised has been partly wasted on pet IT projects which the populace doesn't need and hasn't asked for (ID cards and NHS system to name two). Our money is being wasted to support the vanity of Labour Ministers who have to be seen to be doing something. However, by taking their eye off the ball, the economy, they fail to realise that it's the pound in our pockets which generally decides national elections.

The current financial crisis is un-precedented in modern times. The Government has propped up the banking system to the tune of many billions, but couldn't find a few pence, in relation to those sums, to save MG Rover.

So let's make it clear again, we don't need a new legal entity and we don't need changes in the tax system. What we need is for the Government to lay off identifiable sectors of the community, especially IT consultants and more importantly spend our money considerably more wisely than they are at the moment! Perhaps then all this debate will die down and we can ALL return to running our business ventures without undue scrutiny from HMRC!

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
21st Apr 2008 23:52

We don't need
a new legal entity. The search for the Philosopher's Stone can be abandoned.

What we do need, however is a tax system that works across the board for small businesses. In other words, that other myth, "the level playing field."

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By IANTO
21st Apr 2008 15:56

Phylosophical phylosophers

Simon,

However much you try to dress the situation up, the intent of HMRC is clear. They only want to target IT consultants, who by and large are the major group which uses incorporation as a business vehicle. Once again, let it be said that this manner of trading is forced on the IT consultancy arena by the agencies who act for clients.

HMRC sees the high earning consultancies and the level of control that is exerted over their financial affairs and wishes to stop it. Ah, but there's the rub. HMRC cannot directly target this group as such tax policy is illegal under EU law. So inevitably there is collateral damage.

Those involved in the collateral damage were largely unaffected by IR35 and the MSC regulations, which were an attempt by HMRC to directly target the IT industry. Now that a greater number are squealing, HMRC's attacks have become high profile.

Forgive me if I'm cynical, but your average "sole trader" was disinterested in the effects of IR35 and the MSC regulations, now it's your turn to take the medicine. These regulations are not about fairness. They are about good old fashioned Labour spitefulness.

I did read an article at the time IR35 was introduced which intimated that Cherie Blair was overhead to say that she deplored the level of remuneration some IT consultants could command. If this were so, then she clearly was unhappy about "ordinary" people joining the "well paid" club that she belongs to!

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By NeilW
20th Apr 2008 16:33

The solution is simple
I find it stunning that there needs to be a consultation at all. The solution is that all business entities must be subject to the same taxation rates regardless of their form.

There is a big bang solution, but one that would require political resolve to implement against the inevitable lobbying torrent.

Failing that the one sure fire way to reduce administrative burdens is to increase the level of system standardisation and automation.

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By User deleted
18th Apr 2008 08:48

Time travel ?
I am posting this comment, I believe, on Friday 18th April.

A comment made to an article dated 3 days in the future (21st April) !

Presumably the article was intended to be posted Monday 21 April, but somehow got posted 18 April or before ?

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