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Institute of Directors warns against turnover-based taxation of small businesses

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The Office of Tax Simplification has provided a ‘sensible survey of the options for resolving a serious issue’, said Richard Baron, Head of Taxation at the Institute of Directors. But he warned that a system of turnover-based taxation could result in some businesses being ‘seriously over-charged’.

‘Turnover-based taxation, or flat charges, would be of very doubtful value,’ he said. ‘Some businesses would be seriously over-charged in relation to profits, and others under-charged.

‘These methods are used in other countries, so it is right to debate them. But we don’t want anyone in government running away with this idea before real business people have made their views known.’

The OTS consultation on a simplified system asks readers: ‘Do you think that businesses would want to take advantage of a simplified system? If you run a small business, would you be interested, and if so, why? Would you still be interested if you pay more tax as a result?’

Baron said the most promising option is likely to be cash accounting. ‘A lot of small businesses probably do this anyway, and the Revenue just don’t notice,’ he said. ‘The start-up phase of a business demands concentrated hard work. Distractions like tax rules reduce the chances of success.’

Paul Belsman, Head of Tax at RSM Tenon said: ‘The idea of simplifying the system for the smallest businesses has to be endorsed but getting there is another matter completely. [The OTS’s] proposals are sensible but fraught with issues to consider – the aim must be to get to the same net tax result you would without going through the current burdensome system and at the moment, and it is difficult to know whether either of the proposals would achieve this.

‘It will be interesting to see how this consultation progresses and we would actively encourage those potentially affected to speak up.’

Disincorporation relief

The absence of tax reliefs on the disincorporation of a business is an issue affecting businesses of all sizes, said Alex Henderson, Tax Partner at PwC. 

‘We welcome the attention that the OTS is giving it and we would like to see them broaden the scope of their review,’ he said.

‘For small businesses, possibly there is a simpler way to deal with the issue, for example, small businesses could be allowed to make elections once every five years as to whether they are to be taxed as a partnership or company; this would in some ways mirror the existing arrangements for Limited Liability Partnerships which are legally corporates but are taxed as partnerships.'

‘The idea of making the move from one trading structure to another tax neutral is appealing. There are already reliefs available when a business incorporates and it makes sense to have some form of symmetry, Paul Besman said.

‘Allowing businesses to change their trading structure as they move through their trading cycle and respond to different circumstances at little tax cost liberates the entrepreneurial spirit, and we support and welcome these proposals.’