How Simple is simple?

/ Tax

Author: Henry Ejdelbaum

Tags: limited company, lookthrough, OTS

We normally focus on things as they are now or changes which we know are going to happen but every so often it is useful to do a bit of crystal ball gazing (don’t worry this is not yet another piece of “life after Brexit” speculation).
The Office of Tax Simplification (OTS) has issued a couple of consultations which give us clues about changes which might be ahead.
The first is “lookthrough” taxation of small company profits. “Lookthrough” means that, instead of (as at present) directors paying income tax on their salaries, shareholders paying income tax on their dividends and the company paying corporation tax on its profits, the company will pay nothing and the shareholders will pay income tax on their share of the company’s profits.
On the face of it simplification but is it really? Consider the following:
• Currently companies have to prepare and file accounts – they will still have to prepare accounts so that profit can be calculated.
• Directors and shareholders have to file tax returns – they will still have to do so.
• The company has to prepare a corporation tax return – the OTS suggests that not having to file a corporation tax return is a simplification but they seem to have ignored that fact that HMRC need to know what the taxable profit is and how it is shared. We already have “lookthrough” entities today – partnerships. Partnerships don’t pay any income tax, the individual partners pay on the basis of their share of the profits, but partnerships have to file partnership tax returns.
So overall no administrative simplification!
Today anybody operating a small business can choose between two options – an unincorporated sole trader/partnership/llp option or a limited company. The choice is driven by commercial and tax considerations. If the OTS ideas turn into real changes there will be three options – unincorporated, limited company paying corporation tax or a “lookthrough” limited company.
We may be wrong but we cannot see any simplification of options!

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