OTS review may mean changes on the way for Limited Company contractors

The OTS review

The Office of Tax and Simplification (OTS) has made recommendations for changes to small company taxation, which would mean major changes for Limited Company contractors.

 

So what are these changes and what do they mean for small businesses? In this blog we explore everything you’ll need to know and how you could be affected.

 

What’s it all about?

A new taxation on shareholders rather than the company is just one of the new far reaching proposals set out in the latest OTS review. They’ve already considered unincorporated businesses and partnerships in previous reviews.

 

Proposal number 1: ‘Look through’

Most hard hitting is the proposal of the ‘look through’ company whereby company shareholders would be charged income tax on profits rather than paying corporation tax. OTS is considering the change further, as they believe it could simplify life for some small companies.

 

The question arises whether this form of taxation is voluntary or mandatory. If the principle of look through became mandatory this would have a dramatic negative effect on the flexibility contractors have on the level of income and the tax outcome.

 

Proposal number 2: Structural change

SEPA – which stands for the sole enterprise with protected assets – is the second revolutionary structural proposal by OTS. It’s essentially a new business entity, that’s effectively a trading model which will provide limited liability protection without the need for formal incorporation.

 

The practical use of a new model of this kind is questionable. It would require changes to tax legislation to be any use for contractors. Agencies and engaging clients are not inclined to use a self employed model due to the risk of liability for PAYE.

 

Simplified administration

A package of changes, including the streamlined, joined up registration and reporting process between Companies House and HMRC, would be welcomed. Limited Companies would also be pleased if PAYE and VAT filing and payment dates were aligned and a ‘truly digital’ service that would include prompts for contractors when filling out forms, were to be introduced.

 

Another area that would be welcomed would include HMRC providing extra evening and weekend support, to assist Limited Companies with their tax.

 

What’s next?

At present, the proposals within the OTS review are just that and are poised for the longer term. Government has asked the OTS to push ahead with further detailed work, suggesting that they are in favour of change. However, the general feeling in camp, is that just as many people are for the changes, as there are against them.

 

The OTS is intending to continue to develop this area and if you have an opinion you’d like them to know about, you can share it here.

 

Reducing the complexity of the corporation tax calculation, abolishing some tax allowances and potentially calculating on a cash basis are ideas for future development. The OTS has expressed their wishes for the government to push all three forward.

 

Intouch Accounting’s view

We are fundamentally against the principle of a look through company and believe that contractors should be entitled to distinguish company from personal money and tax should follow that principle.

 

The proposal for a non corporate limited liability model has definite attractions for freelancers but has no added value to Limited Company contractors. We would encourage the addition of a such a model for use where it is deemed appropriate. However, it must follow with appropriate changes to taxes to avoid restricting the market for work (by agencies and clients) for those using the model.

 

Looking to the future

The review recognised the increasing trend for people to be their own boss with many sole traders going Limited in order to limit their liability, enhance their professional credibility and formalise their business structure.

 

The proposals are bold and the implementation likely to be challenging. If ‘look through’ and SEPA are introduced, there is the potential for the majority of micro businesses to feel out of their comfort zone.
Whatever changes are implemented to the small business sector, there will certainly be a large imprint left on the corporate market landscape.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Employment status review before 2015 Budget

Employment status review before 2015 Budget

With business behaviour changing and an increase in people working in multiple roles, there is a need for the government to look at the tax system.

Many people are working for more than one business where they may be classed as employed for one role and self-employed for another. Freelancing and contracting levels have grown and times are changing in the way we conduct business. A suggested ‘third way’ of working between employment and self-employment is becoming a more popular approach.

With significant tax and NIC differences between both ways of working, The Office of Tax Simplification (OTS) has been requested by the government to look at the dividing line and provide a report before the 2015 Budget.  Getting the status right is important as the wrong way of working could be costly for both the company and the individual.

As part of their review, the OTS will look at some of the following:

  • The level of uncertainty in current employment status
  • The sectors that have difficulties in administering the tax system
  • The way in which current rules and guidelines fit with anyone working multiple roles
  • The possibility of simplification through increased use of digitisation
  • The way other countries manage their approach

However, the review will not include issues around IR35, the Construction Industry Scheme (CIS) or the expenses rules.

With a report in time for the 2015 Budget, it is likely that any ‘quick wins’ will be taken forward as soon as possible, with other points to be reviewed by the next government.

The full terms of reference can be found online. https://www.gov.uk/government/publications/employment-status-review

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

OTS is reviewing over 1,000 tax reliefs

OTS is reviewing over 1,000 tax reliefs

FOR THE FIRST time in 200 years someone has managed to map out the UK’s tax relief system – a system which has ballooned according to the government of the day, taxpayer demand, and backlashes to aggressive tax schemes.

The Office of Tax Simplification (OTS) is trawling through 1,042 reliefs, allowances and exemptions – which cover everything from selling assets stolen by the Nazis, to deep-sea drills- before recommending which should be simplified or scrapped.

The difficulty facing the OTS is that each relief – even the ones which seem obscure – may be vital to a particular group of people or businesses.

For this reason, the UK’s dense mesh of double taxation reliefs – an area the OTS is known to be looking at – will raise major points of conflict if they are “simplified”, because simplification often translates as a relief being withdrawn.

It’s inevitable the OTS will encounter a wall of resistance with any potential changes in this area because of the sheer number of groups that come under the double taxation umbrella. It’s not just the high-net worth individuals and corporates considering whether to leave the UK for countries with lower tax rates.

Double tax reliefs also affect the UK’s two million migrant workers, overseas bank workers – most of whom aren’t super-rich traders – 22,000 diplomatic staff, and non-domiciled individuals who all rely on these breaks.

Lowly-paid migrant workers currently don’t have to file tax returns when paying tax on any overseas income they make below a value of £10,000.

Even a slight change to the rules – for example, a decrease of the £10,000 ceiling – could see more of these lowly paid workers shelling out for tax returns to be prepared and also cause a rise in admin costs for the taxman.

Against this backdrop, the Low Incomes Tax reform Group (LITRG) will be lobbying for the relief to be kept. “We are keen that this [relief] is preserved – not least as it was LITRG who persuaded ministers to introduce it,” an LITRG spokesman said.

If the relief were removed we think the amount saved would very quickly be swallowed up by the administration costs of dealing with the tax returns of low-income migrants,” LITRG added.

Another good example of the difficulty facing the OTS are the tax rules for freelancers. These are relatively new, but have suffered from criticisms that they are fiendishly complex.

There is already a project running to simplify the freelancer income tax rules known as IR35, but there are related areas which could also come under the OTS spotlight.

The numerous reliefs available to businesses for training expenditure could easily be changed or withdrawn, but this would have a marked effect on the freelancer sector.

Contractors trading as managed service companies keep their skills up-to-date in order to stay in business, and often have to fork out for expensive training courses.

With 20,000 members potentially affected, the Professional Contractors Group (PCG) says it would strongly resist any withdrawal of income tax relief on relevant training courses.

PCG representatives are currently preparing to lobby the OTS for guarantees that training courses will be spared the axe.

But the OTS will not just face resistance from taxpayers. The panel could also face opposition from both the Treasury and HM Revenue & Customs: the OTS has been told to make sure recommendations end up revenue neutral, a senior OTS figure tells Accountancy Age.

Trying to make sure that the UK’s coffers neither benefit or lose out by the proposed changes to potentially hundreds of reliefs is almost impossible, advisers say.

The OTS already has enough to worry about without government divisions potentially taking umbrage with its recommendations.

One particular bugbear for the taxman is the way UK- based multinationals pass company funds through subsidiaries in low tax jurisdictions.

Controlled foreign companies (CFC) rules cause advisers and businesses a major headache in terms of complexity, and efforts have been dragging on for years to simplify the system.

These efforts have pushed on in recent months but that would not stop the OTS weighing into the CFC issue because of the panel’s wide-reaching mandate to make recommendations on all areas of the tax system.

John Whiting, the tax specialist in charge at the panel, has said there will be no issue the body will shy away from in trying to make the system less administratively complex.

“It isn’t about saving money, this is about a more efficient tax system,” Whiting said.

“If you come up with some sensible recommendations, it will make it very hard for the government to argue against them.”

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.