In March 2016 the Office of Tax Simplification (OTS) published its 'Small company taxation review'. It focused on making the tax system simpler for micro-companies with fewer than ten employees.
The report makes a number of suggestions, some of which would see a major shake-up of small company taxation if they are taken up by HMRC, including.
- A ‘look through’ approach which would see shareholders being taxed directly on the company’s profits instead of the company paying corporation tax: to offer simplification for one-person businesses which distribute most or all of their profits and are not looking to increase in size.
- Cash accounting for companies along similar lines to cash accounting for unincorporated businesses.
- A ‘sole enterprise protected assets’ structure to give sole traders liability protection for their personal assets without the need to incorporate.
- Consideration as to how a consolidated tax model for micro companies could be established in the UK. More on this below.
The OTS makes a number of recommendations:
- Aligning taxable profit with accounting profit by reviewing and eliminating sundry tax adjustments.
- Aligning filing and payment dates across government departments; VAT, PAYE, Corporation Tax, Annual Returns and Statutory accounts.
- Improve the VAT MOSS system that deals with EU cross border VAT issues.
- Raising awareness of the VAT flat-rate scheme and considering the feasibility of an advance-clearance facility for VAT.
- Revisiting disincorporation relief, increasing the £100,000 limit and extending the relief to transfers to a limited company.
- Provision of out of office hours support by HMRC given that small company owners are often running their companies during working hours and dealing with tax and administration during evenings and weekends.
- A more streamlined on-stop-shop approach to enable businesses and their agents to discuss multiple taxes in a single phone call, and also linking Companies House with HMRC to avoid double entry and reporting of information.
- Introducing a unique identifier code which is recognised across all taxes and by Companies House.
- Making HMRC’s i-forms more flexible for users, including enabling users to view different pages without first having to complete each one fully.
Consolidated tax model
The OTS report considers alternative business structures and methods of taxing businesses in detail, looking at consolidated tax regimes in a number of countries.
A further recommendation in the report is the study of a “consolidated tax model as part of a longer term strategy for genuine tax simplification for micro companies”.
Such a system could include the following attributes:
- Turnover as a basis for tax.
- A cash basis so tax is payable on receipts.
- Different tax rates or fixed deductions to take account of different businesses.
- A consolidated tax to replace corporation tax, PAYE and NIC, as well as personal income tax on distributed profits and possibly business rates.
- A turnover threshold for eligibility, possibly aligned with the VAT threshold.
This report was prepared following an announcement in the Summer 2015 Budget, and a survey to collect views from small companies ran until 1 January 2016.
OTS: Small company taxation review published March 2016.
See Finance Act and Bill Rolling Planner 2016/2017 for further developments.