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Busy Practitioner by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP outlines some proposed tax changes for small business, and warns of possible future Government changes to the business tax system.The tax ‘landscape’ is constantly changing it seems, quite apart from the legislative changes announced in the Pre-Budget Report and introduced in Finance Acts each year. Recent examples include the integration of HM Customs and Excise and the Inland Revenue into HM Revenue and Customs (HMRC), and the introduction of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), with effect from 6 April 2005.

Tax changes for small business

A target for future change is the tax system for small business. As mentioned in an earlier ‘Points of Practice’ (Busy Practitioner, January 2005), the Government published a discussion paper in December 2004 entitled ‘Small companies, the self-employed and the tax system’ on the tax regime for incorporated and unincorporated small businesses. At the same time, the creation of a ‘small business unit’ was announced ‘…to ensure that the needs of small business lie at the heart of the new department’ (i.e. HMRC).

In addition to reforms of the tax system for small business, the Government issued a consultation paper at the same time as Budget 2005 entitled ‘Working towards a new relationship’, dealing with ‘priorities for reducing the administrative burden of the tax system on small business’. The main proposed changes are summarised below.

• REDUCED PAPERWORK – small businesses would be required to provide information only once. A Small Business Advisory Group has been formed comprising representatives from HMRC and small business, which will provide input on the simplification of forms and returns.

• PAYMENT OF TAX – increased flexibility in the choice and availability of payment options.

• INSPECTIONS – less time spent dealing with inspections. Businesses will be ‘risk assessed’ and better targeted for ‘audit’ (i.e. where the risk of deliberate non-payment of taxes is considered to be highest) subject to a small number of random enquiries, with no audit inspection without a reason. Joint visits to businesses by the Inland Revenue and HM Customs are also being piloted.

• COMMUNICATIONS – the Government wishes to develop a ‘whole customer view’ policy through a single department providing a single point of contact to businesses, including details of their ‘tax account’ covering both direct and indirect taxes.

• SUPPORT AND EDUCATION – to assist businesses with tax compliance at key points (e.g. start-up, upon VAT registration and/or taking on their first employee).

The Government cites various immediate steps to improve small business administration and compliance, including the introduction of a shorter (i.e. four page) tax return for ‘500,000 of the smallest businesses’ from April 2005, a simpler Form 42 for newly-incorporated businesses, and the abolition of tax credit payments via employers between November 2005 and April 2006.

Businesses and their advisers have the opportunity to participate in the consultation by 30 June 2005. The full consultation document can be downloaded (in pdf format) from the HM Revenue & Customs website: by clicking on this link.

Business tax system

Perhaps of greater concern to small business owners and their advisers is what tax changes could result from the Government’s apparent desire to create a level playing field in the taxation of incorporated and unincorporated businesses. In particular, the discussion paper ‘Small companies, the self-employed and the tax system’ refers to ‘tensions in the tax system that can have a disproportionate influence on normal commercial decision-making’, and suggests that tax-motivated incorporations may be a target for future change, with the Government considering ‘…the targeting of incentives to ensure that commercial factors, and not tax considerations, determine the legal structures that are adopted for business’.

The proposed time limit for responses to the discussion document was 29 April 2005. Subject to the outcome of the General Election, there is likely to be a period of uncertainty for practitioners advising clients on the most tax-efficient business structure for their business.

May 2005

Mark McLaughlin CTA (Fellow) ATT TEP