This article sets out where we believe the taxation of small companies is heading and was triggered by the publication of the “Small company taxation review” by the Office and Tax Simplification (OTS).
As a result of the review, the three initiatives we believe HM Revenue and Customs (HMRC) will introduce and which transform the tax for business owners and the accounting profession are:
- The “look through” concept
- Cash accounting for tax being extended
- Limited liability for the self-employed
The look through concept and limited liability for the self-employed means there would be no real advantage for trading as a company. This would encourage business owners to be self-employed.
If the cash accounting scheme is extended to VAT registered business and companies but remains optional, then under the Digital Tax Accounts proposals, business owners will have a choice:
- Pay an accountant to produce quarterly accounts and tax calculations
- Switch to cash accounting and represent themselves
The cost of quarterly accounts and tax for a self-employed person is likely to be £2,000 a year, or more. The self-employed are unlikely to be happy to suffer professional fees at this level so will opt for cash accounting and represent themselves using software.
According to the review, businesses that remained as a company would be able to use cash accounting so there would not be additional accounting fees.
The accountant’s role will change from producing year-end accounts and tax returns to to providing:
- Software set-up, training and support
- One-off interventions e.g. tax enquiries
This will dramatically reduce accounting fees for small businesses. However, businesses will not be better off because they will end up paying more tax and National Insurance. The government needs this to close the tax gap and tackle the National Debt which is growing at over £5,000 a second.
The technology is already being made available. QuickBooks has already issued an App for the self-employed in the UK and Xero have released Xero Tax Touch in the USA.
This review and changes may upset many accountants but it does save businesses professional fees and level the tax playing field between the self-employed trading as a limited company.
Crunchers would support the changes and encourages business owners to claw back the cost of extra tax and national insurance by developing their business and becoming more profitable.