Change on the Richter scale is on the way if recommendations from the Office of Tax Simplification (OTS) for changes to small company taxation get the go ahead, say Philip and Sarah McNeill.
A new ‘look through’ company, taxing shareholders rather than the company, is among far-reaching proposals put forward in the latest OTS review.
This is the third time the OTS has entered the lists. Simplification for small unincorporated businesses and partnerships has already come under the spotlight. Last week’s publication completes this round of reviews.
The micro business
The review focuses on the ‘micro’ business. This is the business with fewer than 10 employees, structured as a company. The UK has more than 1.3m of them. The largest slice of the incorporated market, these are the heartland of most high street practices.
“A company with a few staff should not face the same burdens as a multinational.” This is the starting point from the OTS Chair, Angela Knight. She is probably preaching to the converted; at Accounting Web, no one is likely to quibble with the need to make the system and more user friendly for small companies.
The real bombshell proposal is the ‘look through’ company, something they have already in countries like New Zealand. Instead of paying corporation tax, company shareholders would be charged to income tax on profits. The OTS thinks this modus operandi could make life simpler for some companies. This is one of two key structural changes that the OTS intends to look at in more detail.
The second structural proposal is also revolutionary. This is the SEPA – the sole enterprise with protected assets. In other words, a new business entity – a model for trading that gives some limited liability protection without the need for formal incorporation.
OTS and the micro businesses they talked with would welcome a package of changes to administration. Streamlined, joined up registration and reporting processes, including between HMRC and Companies House, for one.
Aligning VAT and PAYE filing and payment dates, annual returns and corporation tax; advance clearances for VAT; a ‘truly digital’ service with pop ups and prompts to completing online forms, for another.
And – can you imagine an out of hours service from HMRC? Providing extra evening and weekend support, when small company owners deal with their tax?
As yet, these are just proposals aimed for the longer term. The review states that at present, opinion is divided on look through. “Many respondents to the OTS consultation were strongly in favour ... just as many strongly against,” says the review.
But the OTS is intending to do more work on these areas. You can contact the OTS with your input here.
Simplifying the corporation tax calculation, eliminating some tax allowances and for the smallest companies, potentially calculating on a cash basis, is another area suggested for the longer term. OTS hopes that the government itself will take this forward.
As the Review says, “Helped by new technology and platforms, the trend is for people increasingly choosing to be their own boss ... Many are sole traders who have chosen to incorporate to limit their liability, to enhance their credibility and to provide a more formal business structure.”
The Review has taken a bold and imaginative look at possible changes. The challenge is going to be in the implementation: if look through and SEPA should become mandatory, there is a potential risk of taking – on present reckoning – half the micro business population out of its comfort zone.
If, on the other hand, they were opt-in structures, would we then face greater diversity in the name of simplicity? Whatever the proposals taken forward, there is no doubt that changes to the micro business population on the scale envisaged here, stands to leave a large footprint in the corporate market.
About Philip and Sarah McNeill
Philip and Sarah McNeill write widely on tax and other matters for both the popular and professional press.