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Tax change could prevent small business losing out in future

21 July: The Office of Tax Simplification and Treasury Select Committee, respected influencers of tax change, make similar recommendations to change the taxation of small businesses and redress the issues highlighted in recent months.

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The COVID-19 pandemic has placed a spotlight on several areas of the tax system which everyone has danced around for years, mostly agreeing that change was needed, while seemingly being too difficult politically to achieve.

For example, the lack of up-to-date information about self-employed taxpayers' income has meant that many newly self-employed taxpayers were denied access to the Self-Employed Income Support Scheme (SEISS) grants.

At the same time, many limited company directors using annual payrolls and interim dividend payments were denied access to the Coronavirus Job Retention Scheme (CJRS) because dividends from investments were indistinguishable from those received from personal service companies and the annual payroll hadn't been run before the cut-off date of 19 March 2020.

These issues were outlined in the Treasury Select Committee’s report of 15 June 2020, Economic impact of Coronavirus: Gaps in support, which estimated that more than a million people had “fallen through the gaps in the support schemes”. The committee urged the government to redress the gaps, including supporting a proposal from the Association of Independent Professionals and the Self-Employed (IPSE) on how to support directors paid in dividends.

Meanwhile, the Office of Tax Simplification (OTS) in its report published on 20 July 2020, OTS evaluation and stock take note, has brought together an interesting evaluation of some of its earlier recommendations. The OTS hopes it “will be a useful contribution to current thinking” and which might give HMRC more up-to-date information in the future about business’s income, while also simplifying the tax system.

The OTS has continued examining the tax system, presenting successive governments with ideas for tax simplification many of which seem to have gone quietly into storage. But perhaps the time has come for these ideas?

In taking stock, the OTS has highlighted the following areas as being in most urgent need of attention:

  • Simpler tax for smaller companies . The report states: “HMRC is continuing to consider the recommendation to explore following the accounts more closely, at least for smaller companies, with only a minimum number of tax adjustments being required. The OTS looks forward to seeing where this leads and to continue contributing to any future work in this area.”
  • Personal service companies: The report states: “The OTS suggests renewed consideration of enabling a small, personal-service style business to operate through a UK limited company while being treated as transparent for tax. The aim would be to provide a fully recognisable form of limited liability, removing the business from corporation tax (salaries, dividends and loans to participators being ignored for tax purposes), together with the relative ease of a self-employment style tax calculation.”
  • Tax administration: The OTS report states: “The OTS reiterates the merit in HMRC doing more to enhance the personal tax account and to integrate it with the business tax account, to provide an end-to-end tax reporting and payment service and facilitate the simplification of tax administration for self-employed people.”
  • Employment and self-employment: The OTS report states: “The OTS is interested in the possibility of a statutory definition of employment for tax purposes being developed. This need not be an attempt simply to codify the current case law principles, but could have different features.”

The OTS’s suggestions are an interesting mix and tackle, directly or indirectly, many of the current challenges facing small business tax. ICAEW’s Tax Faculty looks forward to engaging in this debate as it develops.