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Simplifying small company taxation

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15th May 2016
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AccountingWEB has given a fair amount of airtime to the work of the Office of Tax Simplification (OTS) over the past couple of months. We’ve been grateful for the various pieces commenting on our two recent reports on Closer Alignment of Income Tax & NICs and small company review.

Looking through the comments from readers has been gratifying as it has shown the interest there is in what we are trying to do, even if some of the comments do not seem to have been based on a full reading of what we have said! We never expect everyone to agree with all of our recommendations and in many cases we are trying to promote a proper debate.

I hope an article on the next stage of our small companies work will be of interest – and may again prompt some input to our activities. (After all, the piece by AccountingWEB’s esteemed Editor on our search for new staff did help get us an excellent group of applicants!)

We know we are venturing into controversial areas and although we will be doing a good deal of our own research, we depend hugely on evidence we gather from businesses, advisers, representative bodies – everyone involved with the tax system.

Contrary to what some people seem to believe, we listen carefully to everything we are told or are sent and take it all into account in framing our recommendations. Of course I can’t guarantee that everything we are told will make it to our final recommendations (nor would readers expect it) and I’m afraid I likewise can’t guarantee that what we recommend will be taken forward. But our small team of practitioners and civil servants try very hard to ensure we put forward practical recommendations that make a difference.

Small companies: a new alternative to incorporation?

Someone starting out in business has two broad choices: operate as a sole trader or through a limited company. (Putting aside partnerships, LLPs, unlimited companies etc. for the moment.) Many people say that a key reason for going into a limited company is, unsurprisingly, that limited liability status. Of course there are many other reasons, not least that potential customers so often demand that their contractors operate though a company.

We detected quite a bit of interest in a possible new trading status which we have termed Sole Enterprise with Protected Asset (SEPA). This would be a sole trader – but with the ability to protect, say, the family home against any claim arising from the business. Could it work? Would there be a demand for it? What registrations formalities would be needed? Crucially, would it be accepted in the marketplace or just cause confusion?

Our aim is to work up an outline for publication in July for comment with a view to concluding whether this is a ‘runner’ by end-September. As a comparator, we’ll also be fleshing out a ‘Self Employed Business’ or SEB. This is potentially a more structured arrangement, offering separate identity (but not a separate entity) and limiting exposure to whatever assets are put into the SEB.

Small companies: lookthrough

A ‘lookthrough’ basis of taxing a small company means in outline that the company is ignored and profits are simply taxed on the proprietor(s). There would be no need to mess about with corporation tax so that would be an obvious simplification…wouldn’t it?

Well, we looked carefully at lookthrough and talked to a lot of people about it. We found some strongly in favour – but many strongly against. As our report set out, although eliminating the CT computation is useful, there would still be a need to do a taxable profits calculation; all the accounting and regulatory aspects are still there for the company; importantly, all profits would be taxed in full which potentially harms investment; and if it is optional, that may simply mean more advice is needed and it just results in a ‘lower tax’ option.

Consequently we were not convinced lookthrough would be a general simplification but cautiously said that we could see some possibilities for a subset of companies that didn’t retain funds. So we are developing an outline to see if we can define that subset in a simple way and show whether there would overall be a simpler procedure for those companies. Again, we plan to publish in July for comment and conclude by September.

What else?

We’re also taking forward work on aspects on income tax/NICs alignment and starting work on simplifying the general CT computation, some of which we have recommended before and is now brought into sharper focus with the making tax digital agenda. Terms of Reference for all the projects are on our website.

More widely, we have just published a Strategy document on how we see the OTS developing. This is framed as a consultation with our stakeholders. 

So if you want to contribute on any of these issues, drop us a line at [email protected]. I promise you we’ll take into account what you say.

Replies (1)

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By Charlie Carne
06th Jun 2016 16:06

If we want liabilities limited to the assets held in the business, there are already two clearly understood entities that achieve that goal: LLP and limited company. The only situation not catered for here is where an individual wishes the protection of limited liability but does not want the corporate structure via share ownership. Surely the simplest solution to this is to consider extending the LLP rules to allow for a single 'partner' (maybe an LLS - Limited Liability Sole-trader if the concept of a single-partner LLP is not acceptable). But it need not have an entirely new set of rules. If simplification truly is the goal, then surely it should just follow LLP rules and use a similar name, rather than creating an entirely new set of 'SEPA' or 'SEB' rules?

As to the second point relating to a 'look-through' company, why would this have an advantage over an LLP? For most small businesses, the key difference between an LLP and a company is that the tax on the former looks through the LLP to the partners, which is what your proposal seeks to achieve. Any new structure will add to the complexity of options, rather than simplifying them!

BTW, to aid understanding of the company vs the partnership, why not abbreviate limited liability companies to LLC, so that non-experts can see an equivalence to LLP (it would also stop people incorrectly referring to LTD's, which is a meaningless term).

Thanks (1)