Small Company Taxation

8th July 2016

The Office of Tax Simplification (OTS) started its life in 2010 and has a remit of attempting to simplify the tax system.

One of its recent projects is a review of the simplification of small company taxation. Small for this purpose is an incorporated business with fewer than ten employees. These ‘micro’ businesses now number approximately 4.1 million in the UK, over 1.3 million of which operate through a company structure.

The review found that among the many reasons for incorporation, the three main ones for micro companies are to limit their liability, enhance their credibility and provide a formalised structure.

Tax savings were not found to be a main driver for incorporation and this has led to one of the areas highlighted by the OTS as warranting further investigation – taxing the company owners rather than the company on a‘look-through’ basis. 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 and therefore reduce the funds available for investment and growth. However, for companies who tend to distribute all or most profits, it suggests the system could work and would be particularly relevant for companies which are effectively one-person businesses.

Another area worthy of further investigation, in the view of the OTS, is the development of a business structure which provides a person with the key aspects of liability protection without the need to incorporate. Such business structures exist in other countries, for example France and Chile. One model could be a ‘Sole Enterprise Personal Assets’ vehicle (SEPA). Here, 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.

Government’s response

In the 2016 Budget, the government asked the OTS to develop an outline of a SEPA vehicle and a look-through system of taxation. It will be interesting to see how the OTS develops these ideas.

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