This week the Office for Tax Simplification issued a Small company taxation review. One aspect of the review is challenging, especially for one-man companies that distribute all the profit as either salaries or dividends.
Topics covered include:
- Streamlined, joined up registration and reporting processes, including between Companies House and HMRC.
- Simpler CT calculations to facilitate digital returns, which would include more use of the cash basis.
- Adopting a “look through” approach, more on this below.
- Creating a new type of business structure that would afford sole traders a measure of limited liability. This may be facilitated by creating a single member LLP or a sole enterprise personal asset protection vehicle.
In one section of the report (1.27) the OTS predicts “Potentially significant cost savings for small companies through a reduction in accountancy fees” if their simplification options were enacted.
And as for “look through”… See paragraph 1.42…
1.42 A number of countries operate a ‘transparent’ tax. This is where small company profits are taxed directly on the shareholders, with the company itself paying no form of corporation tax. We have considered a specific form of transparent tax called look-through. This would mean the shareholders being assessed to income tax and national insurance contributions (NICs) on their share of the profits. Dividend distributions would not be subject to tax as the profit share would already have been charged.
The devil as always will be in the detail but this “look through” approach could easily derail the present tax planning arrangements for small companies, especially those who distribute all their post CT profits. Shareholders may not pay much more income tax but they would pay more NIC.