Changes to tax aimed at helping smaller firms

The Office of Tax Simplification (OTS) has set out plans for easing the tax burden that many small enterprises face.

One suggestion is that the capital allowance limit for small businesses should be determined for a set number of years so that firms can be more certain about the tax reliefs for investment and can plan ahead.

The present limit is £25,000, but, the OTS added, that threshold could be divided across two years. This would enable firms to recoup allowances on major purchases that may otherwise be forfeited.

Another OTS recommendation is that the way in which business expenses and employee benefits are dealt with under the tax system should be less complicated.

Under the proposed OTS system, the Treasury would set up an annual expenses allowance that would not require receipts. There would also be an annual allowance for employee benefits and expenses for small firms of between £100 and £500 each year before it is necessary to file a P11D form.

Consideration was also given to business structure. Very small businesses, perhaps with just one employer and shareholder, that wish to dis-incorporate, that is shed their company status, should be allowed to do so without having to cope with an immediate tax charge.

On corporation tax, the OTS report suggested that the dual rate system was “unfair”. Currently, the small firm rate of corporation tax is to be cut to 20 per cent. For large firms, the rate is to be reduced in phases over the next four years from 28 per cent to 24 per cent.

However, the cut in the large firm rate is to be financed by reductions in the investment allowances permitted both companies and partnerships and the self-employed.

The OTS described this as discriminatory and, instead, put forward the case for a single rate of corporation tax that would remove any need for a plethora of rules that distinguish between different sizes of business.

Elsewhere in the report, the OTS argued that this April’s reduction in small company corporation tax, the increase in income tax personal allowances and the rise in employees’ national insurance contributions would deliver an impact on businesses that outreaches the effect of the top rate rate income tax rate of 50 per cent.

It pointed out that employees who earn around £50,000 annually will be paying as much as £7,000 a year more in tax than if they were a one-person company.

The true marginal rate of income tax, along with the introduction in October of new rights for agency workers, could encourage a new wave of incorporations.

This could involve a significant loss of employers’ NIC payments. To balance this, the Government may need to push up the rate of taxation of company dividends and investment income, the OTS said.