The leading tax and accounting bodies have published their responses to the Office of Tax Simplification (OTS) discussion papers on small company tax reform, ‘Lookthrough taxation’ and ‘Sole Enterprise with Protected Assets'.
The OTS's discussion documents which consider new trading vehicles for micro entities were originally published in July 2016: see Small company tax reform: further OTS discussion.
Responses from the Chartered Institute of Taxation (CIOT), Association of Taxation Technicians (ATT), Institute of Chartered Accountants in England and Wales (ICAEW) and Association of Accounting Technicians (AAT) are generally negative in tone. In particular, they raise concerns that the proposals will increase, rather than decrease complexity for small businesses with little material gain.
Lookthrough taxation
The ‘Lookthrough taxation’ paper proposed a new way of taxing small companies: they would be treated as if they were transparent, with all the company’s profits and gains allocated to the proprietors.
Responses by the main bodies were universally negative:
- None of them believed that lookthrough taxation would be a simplification or deliver significant benefits.
- Voluntary uptake was likely to be low given the tax, administration and cashflow implications.
In its response the CIOT:
- Acknowledge the appeal of evening out the treatment of different business structures, but believes this will be challenging in practice.
- Argue that this is not the right time to introduce a new model given Brexit, Making Tax Digital and the recent changes to dividend taxation.
The ICAEW highlighted in their response that:
- There is already significant confusion amongst small business owners regarding their legal obligations: introducing a lookthrough model is likely to make this worse.
- It would be more appropriate to extend disincorporation relief (which expires 31 March 2018) and publicise it better.
The AAT and ATT expressed concerns that entrepreneurship could be stifled if retained profits are taxed in the same way as distributed profits.
The ATT are also concerned that some, at least, of the enthusiasm for lookthrough may have more to do with tax yield and perceptions of fairness than with simplification or administrative efficiency. This would go beyond the remit of the OTS.
Sole Enterprise with Protected Assets (SEPA)
The ‘Sole Enterprise with Protected Assets (SEPA)’ paper set out a way of providing personal asset protection to business owners without the need to incorporate.
Both the ICAEW and AAT:
- Acknowledge the benefits of limiting liability without having to incorporate.
- Fear that the SEPA is likely to introduce more complication for small businesses without any material benefits.
In their response the ICAEW highlighted that:
- The SEPA was likely to give rise to many practical difficulties and would most likely only be used by a small number of businesses.
- The proposal shouldn’t be pursued in the current form at present, particularly given the other issues which businesses are having to deal with.
The AAT noted that:
- What SEPA has to offer could easily be covered by the insurance industry instead.
- If we were to go ahead with SEPA:
- Protection of the owner’s home should not be extended beyond business debt, and should be set aside for those found guilty of criminal negligence or wrongful trading.
- Consideration should be given to widening the scope of assets which could be protected.
- A cap on the level of protection was reasonable, but it is hard to say what this could be, especially given regional variations in what might be considered 'reasonable'.
The ATT:
- Question whether it is necessary to introduce a completely new and very unfamiliar style of business vehicle in order to achieve the objectives of SEPA.
- Suggest that it would be far simpler to just permit single membership LLPs instead.
The CIOT did not respond to this consultation.
Links
The original OTS discussion papers:
Sole Enterprise with Protected Assets
All of the ICAEW's consultation submissions can be found here
All of the CIOT's submissions can be found here
All of the ATT's submissions can be found here
The AAT's responses:
Sole Enterprise with Protected Assets
ICAS did not respond to either of these consultations. Their responses to other consultations can be found here
