By Marcus Leach

The Office for Tax Simplification (OTS) has recently published two documents that they hope signal the end of sterile debate about what needs to be done to reform the taxation of very small businesses and lead to positive action.

What must first be determined is just what a ‘very small’ business is. It is estimated two million small businesses have a turnover of no more than £20,000, approximately 2.5 million less than £30,000 and 3 million are below the VAT registration threshold of £73,000.

Any improvements to either the compliance obligations or tax computation will be well received but what is required is a robust system that is fit for purpose from the start and will not be subject to excessive tinkering and debugging after it has been introduced.

The OTS notes that a large number of companies were formed to take advantage of the very attractive corporation tax regime: for a period the corporation tax rate was 0% on profits up to £10,000 and it took a few years before it was noted that if the rules created a ‘loophole’ large enough for the proverbial coach and horses, the next problem would be traffic congestion.

But there are many, very good non-tax reasons for operating through a company, and newly incorporated businesses are obliged to incur the additional costs associated with preparing and filing accounts and annual returns at Companies House.

One of the biggest obstacles to flexibility of business organisation is the absence of tax relief on disincorporation. The OTS proposal to remove the tax disadvantages of ‘disincorporating’ from very small companies is a very sensible idea indeed.

For the millions of very small unincorporated businesses the OTS has submitted a number of options for consideration. Options such as cash accounting or even a fixed flat rate of tax, would be more attractive than the need to prepare formal accounts.

A note of caution is necessary here as the VAT flat rate scheme has proved to be relatively unattractive as the rates prescribed inevitably mean there are as many losers as there are winners. It follows that consideration of a possible direct tax flat-rate scheme should be accompanied by a review of the VAT scheme to ensure that the methods are not just compatible but as nearly as is possible while maintaining fairness, the same.

However, for any business with employees, it is likely that operating PAYE is the greatest administrative burden. Attempting to set an all-encompassing flat rate that also took the employees’ tax liability into account would probably be a step too far, not least because we still, nominally at least, have a contribution-based national insurance scheme. Attempting to deal with that issue would delay the implementation of this urgently needed reform.

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