The Office for Tax Simplification recently carried out a review of small businesses to make informed proposals on how the tax system could be made less complex for them.
The remit of the Office of Tax Simplification (OTS) as its name suggests, is to find effective ways to make tax less complicated. And it has been attempting to do so since 2010.
The OTS has recently carried out a review of the simplification of small company taxation (small for this purpose being an incorporated business with fewer than ten employees). These ‘micro’ businesses now number approximately 4.1 million in the UK, with over 1.3 million of these operating through a company structure.
Key reasons why businesses incorporate
The review found that the three main reasons for choosing to incorporate were to limit their liability, enhance their credibility and provide a formalised structure.
Tax savings were not found to be a main driver for incorporation. The OTS highlighted this as one of the areas that warranted further investigation ie. to tax the company owners rather than the company on a ‘look-through’ basis.
In practice, this would mean the shareholders being assessed to income tax and national insurance contributions on their share of the profits. Dividend distributions would not be subject to tax as the profit share would already have been charged.
The OTS accepts the main argument against look-through is that it would subject profits retained by the company to full income tax/NICs. This would, therefore, reduce the funds available for investment and growth. For companies who tend to distribute all or most profits, however, it suggests the system could be particularly relevant for companies which are effectively one-person businesses.
Protection without the company structure
A second area flagged for further investigation was the development of a business structure which provides a person with the key aspects of liability protection without having to incorporate.
Such a business structure already exists in other countries, including France and Chile. One model could be a ‘Sole Enterprise Personal Assets’ vehicle (SEPA). In this case, the self-employed individual would not have a separate legal identity, but there would be a provision for protecting the assets of the individual. These assets could include the individual’s home, any non-business vehicles and any other substantial assets.
A response from government
In the 2016 Budget, the government asked the OTS to develop an outline of a SEPA vehicle and a look-through system of taxation. We look forward to seeing how the OTS develops these ideas and will keep you informed of any developments.