Small businesses make up over 99% of the 5.7 million businesses in the UK, with three-quarters solely employing their owner and no one else. They take many forms, from partnerships to small limited companies, to sole traders. Whatever their form, small businesses are vital to the UK economy, paying just over a third of all tax paid in 2017-18.
Dealing with their taxes, as well as the normal daily pressures of running the business, can become somewhat burdensome. In recognition of this, the Office of Tax Simplification (OTS) recently published its report Simplifying everyday tax for smaller businesses: a further business lifecycle review which calls on government to prioritise action to address long-standing concerns about the experience of smaller businesses.
Simplifying tax for the self-employed
The 80-page document makes 10 core recommendations with a further 18 additional recommendations. One of those core recommendations is to explore an optional PAYE-like experience for self-employed people. During the course of the OTS’s review, quite a number of small businesses said that they would welcome an optional process whereby they could have an appropriate amount of tax deducted from their income each month.
Up until November 2017 it was possible for individuals and companies to “invest” in HMRC by purchasing Certificates of Tax Deposit which could be redeemed against selected taxes. Interest was paid but only on tax deposits in excess of £100K!
Of course, it is possible for individuals and businesses to make voluntary payments of tax under Self-Assessment to set against future liabilities but better to set monies aside in an easy access, interest bearing account, so that capital is made to work for the business and can be utilised in the case of an emergency.
The OTS will produce a future paper that will develop this self-employed PAYE idea further and consider the potential for extending it to include the wider self-employed population.
Self-employment versus employment
The report recognises that one of the key drivers for contractors working through a PSC is due to pressure from engagers, who wish to avoid the cost and complication of taking on employees. Equally, there is also evidence that some agencies have marketed the tax and NIC savings from using a PSC to those they place with end clients.
As freelancers know only too well, deciding whether someone is genuinely self-employed or really a ‘disguised employee’ is fraught with difficulty. HMRC feverishly promote their online tool CEST, triumphantly claiming that since implementation it has bee used 800,000 times and reaches a decision in about 85% of cases. Of the decisions made, approximately 60% were found to be self-employed and 40% employed. CEST, however, continues to be criticised and eyed with suspicion because it does not address all the issues of employment status, e.g. mutuality of obligation (MOO), and the way it weights the questions and answers.
OTS on CEST and the off-payroll rules
HMRC are planning a number of updates to CEST, including using plainer English, more in-depth and updated guidance, and looking at having more embedded data in the tool (info boxes and pop-ups at points where users may need further explanation). The OTS would like to see these implemented before 2020 and have also suggested that HMRC signpost people to guidance and the employment status helpline, where CEST produces an indeterminate result or the taxpayer does not agree with the tool’s decision. Whilst the OTS are well-meaning, I would be very hesitant in recommending HMRC’s own helpline to resolve a matter of status, none more so because of the department’s less than the impartial attitude that unfortunately exists at this moment in time.
Despite the introduction of the ‘off-payroll’ rules to the public sector in April 2017 and the plan to roll these out to the private sector next year, the OTS are critical that this anti-avoidance legislation is dealing only with the symptom rather than the underlying issue, which is the differential tax/NIC treatment and other regulatory burdens that make an employee significantly more costly to a business than a contractor.
Sadly, whilst the OTS acknowledges that there is no formal process by which a contractor can appeal an ‘inside IR35’ ruling by a public sector body, that there should be such is not one of their recommendations.
Small company taxation
For small companies, there are simplified accounts standards and whilst a template for accounts preparation exists it cannot be used for tax purposes. This creates a barrier for the smallest businesses, who can find it challenging to produce a balanced set of accounts. HMRC told the OTS that a significant proportion of calls from businesses struggling to complete their company tax returns was due to accounts not balancing and being rejected by the system.
An optional template that the simplest businesses could use for both tax and company reporting would be a helpful simplification and HMRC should work with Companies House to develop this. A short form of the CT600 (corporation tax return) used to be available for small companies but this was withdrawn for accounting periods starting after 1st April 2015. As a result of this, accountants are having to send their clients multiple pages of returns containing zeros for them to check before filing with HMRC, adding complexity and cost to the preparation of the return. A simple tax return process should, therefore, be made available for the simplest corporation tax calculations.
Think once, think twice
The OTS have previously said that it is almost too easy for a business to set up a limited company without understanding the legal, accounting and administration implications. This is borne out by the fact that significant numbers of companies have been set up and closed in recent years. HMRC’s records show that 2 million companies formed since 2010 have since been struck off the company tax register. Of these, 1 million were struck off before their first tax filing date. To help address this issue, the OTS suggest offering people a nudge to stop and think before they finally make the plunge to set up a company.
For those that are certain that a limited company is for them, a start-up information package should include a summary of the pros and cons of incorporation and explain the differences between a company and its owner.
Other recommendations of note include improvement to the PAYE/RTI system and simplifying the process of closing down a company.