OTS consults on revised small company taxation models

The Office of Tax Simplification (OTS) is seeking feedback on two discussion papers looking at different approaches to small company taxation, namely a ‘look-through’ approach to accounting and the introduction of a Sole Enterprise with Protected Asset (SEPA) model, both of which it says could reduce complexity

The OTS says look through taxation is a way of taxing small companies and their owners that allocates the profits (including all income and gains) of the company to the owners. For tax purposes, the company is ignored (so no corporation tax) and instead the owners are taxed directly on the company’s income under income tax and capital gains tax (CGT) rules.

This would mean the shareholders being charged income tax and Class 4 national insurance contributions (NICs) on their share of the profits. No further tax would be due when dividends were payable, as the profit share would already have been charged.

The OTS says that as the owners will already be subject to income tax/NICs, on the surface there seems a real simplification: there would be no need to worry about corporation tax, which according to its research causes difficulties and is usually outsourced.

Look-through may also go some way to ensuring that businesses and companies whose operations are comparable from a commercial perspective are also taxed in a comparable way, although the OTS warns that it does not address the issues covered by IR35 legislation in circumstances where a company’s income is to be taxed as the owner’s employment income.

OTS’s earlier research suggested that look-through would not be a general simplification but could offer possibilities for a subset of companies. The latest discussion paper looks at this in more detail, and invites comments on a range of issues including who would look through apply to; how profits would be allocated to owners; the likely tax consequences and how that tax would be collected; and whether look-through should be an optional, default or compulsory system.

The second discussion paper explores the issues around a new model, SEPA, which would make provision for protecting one or more of the assets of a self employed individual. The OTS says its small company taxation review found many of the smallest companies struggled with the tax compliance burdens associated with being a company. At the same time it was discovered that the most common reason given by small companies for incorporation was for limited liability rather than tax reasons.

It now wants to encourage debate around what SEPA would look like and whether something like this would actually be used by businesses and if it would actually prove to be a simplification.

The paper poses a number of questions, including whether the new status would be easily understood, or could cause confusion; whether traders would use it as an alternative to incorporation; whether it would be accepted as a valid business form by other traders, banks and other potential creditors; and whether the mooted legal protection against personal assets would work in practice under the law of insolvency and other areas.

The OTS is inviting comments by 30 September at the latest (preferably by 12 September) on both topics and plans to publish its conclusions in October.

The OTS discussion paper on look-through is here.

The OTS discussion paper on SEPA is here.

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