OTS puts small companies tax under the microscope

28 October 2015

Andrew Hubbard 

Understandably it is the tax affairs of the largest companies which grab the headlines. But they form only a tiny part of the total population. There is something like 1.5million active companies in the UK but of these, less than 7,000 are – to use the number of employees as a benchmark - large.

If you look at things through the other end of the telescope they look very different. Many of the complex rules designed for large companies actually apply to companies of every size, but the reality is that many of them don’t really work properly for small businesses. Then there are the additional problems of the cross-over between business taxes and the personal taxes of business proprietors. The interaction of rates, allowances and the different ways of computing profit mean that small businesses face a wealth of tax issues not really faced by their larger rivals. The changes to dividend taxation, which come into effect next year, are just one symptom of this complexity.

The first project of the newly-beefed up Office of Tax Simplification is to have another look at the way in which small companies are taxed. I say ‘another’, because we have been here before. The OTS’s first project was also the taxation of small companies. That project made some modest progress, but there was no interest in government in taking up some of its more radical suggestions. Five years later, the political and economic environment has charged and I sense that the government is now prepared to consider significant reform.

Certainly the OTS publication this week setting out some of the key questions it is looking to answer suggests that we are going to get a proper review of what might be possible. I’ve long thought that some form of ‘look through’ basis for very small companies – under which the profits are assessed directly on the proprietor - might well work for many people, and I am pleased that this is one of the areas which the OTS will be looking at.

Tax reform in this area will never be as newsworthy as the latest story about the tax affairs of a high-street multinational, but given the critical importance of small businesses to the economy, perhaps it should be. Certainly I will be using this briefing to report regularly on developments.