All Change? Small Companies Review

 

Sarah Laing looks at potentially far-reaching proposals to simplify the tax administration burden for small companies and their owners.

 

In March 2016, the Office of Tax Simplification (OTS) published its recommendations following a simplification review of small company taxation. 

 

The review focused on incorporated businesses with fewer than ten employees (known as ‘micro’ businesses), of which there are now some 4.1 million in the UK, with 1.3 million operating through a company structure.

 

Currently, the UK operates a corporate tax regime on a ‘one-size fits all’ basis, modelled on a traditional company, with third party shareholders and clear intentions for future growth. However, shifting attitudes over recent years have resulted in an increase in people choosing to contract their services to large companies, or using platforms and other disruptive technologies to obtain their work, rather than being an employee. This shift has, in turn, resulted in an increased need for the tax simplification for micro businesses.

 

The OTS review found that among the many reasons for incorporation, the three main ones for micro companies are to limit their liability, to enhance their credibility and to provide a formalised structure. Interestingly, the review found that a combination of many small issues means that some 76% of micro businesses believe it is safer to leave corporation tax to their accountant than to do it themselves.

 

The OTS highlights three areas which it considers warrant further investigation:

 

The first recommendation concerns ‘look through’, which means that instead of paying corporation tax, a company’s shareholders would pay income tax on the profits directly. Although many respondents to the OTS consultation were strongly in favour of this, just as many were strongly against. The OTS says that while unlikely to be suitable for growing companies, this proposal could offer simplification for the majority who distribute all their profits. The detail and impact of this recommendation are to be explored further.

 

The second issue concerns administration. The OTS acknowledges that the current system puts a disproportionate administrative burden on micro companies, who face the same accounting and tax system as large companies. Broadly, the review established that ‘cash accounting’ for tax, which can currently be used by most small unincorporated businesses, would be the simplest and most appropriate approach for incorporated micro businesses. The review therefore recommends further exploration regarding this.

 

The third main proposal covered in the review concerns the administrative burdens surrounding incorporation for small businesses. The OTS acknowledges that the easiest way to simplify the tax burden for small companies would be to remove them from the corporation tax system altogether. Given that limited liability is cited as the most common reason for incorporating, the OTS believes there is merit in a system that provides protection for personal assets for sole traders, limiting their personal liability while allowing them to continue to trade as a sole trader with the associated accounting and tax treatment. France already has a similar system in place called déclaration d’insaisissabilité (declaration of unseizability). The OTS therefore proposes that it develops an outline of such a vehicle (a ‘sole enterprise with protected assets’ or SEPA) to test its practicability and whether it would deliver the desired personal asset protection in practice. As part of this work the OTS says it will consider further the single member LLP route. 

 

Broadly, the OTS says that, in these changing times, a remodelled small company landscape is much needed. The proposals aim to create a tax environment in which business structures and tax obligations are simpler because they are better matched to the needs of different types of small business. The OTS plans to do more work on key structural change ideas, including the ‘look-through’ basis of taxation for some small companies and whether a new trading vehicle (a ‘sole enterprise with protected assets’ or SEPA) would be useful. The OTS will now take its recommendations forward and expects a response from the government in due course.

 

The OTS is investigating the possibility of launching a new ‘one stop HMRC shop’ approach to an out-of-hours service, helping to reassure companies trying to do the right thing when things go awry. In the meantime, guidance on running a limited company can be found of the Gov.uk website here.