Potential new look to tax system for small companies

The March budget made a number of surprising and unexpected announcements which have the potential to affect businesses in relation to tax liabilities and their associated rules. Whilst some of the announcements, have or will shortly come into force, other government propositions are still to be considered.

One such announcement was that the government was considering the very real possibility of introducing a completely new system in relation to small company taxation. They have requested the OTS (Office of Tax Simplification) to review and ultimately consider the feasibility of this new tax system, in greater detail and to determine its future viability. It isn’t yet known what findings have been made in this regard, however, the government appears very keen to overhaul the current system and replace it with something new.

The proposed new system would be applicable to micro-entities with up to nine employees, with the proposal of taxing shareholders directly based on their company profits, in proportion to their shareholdings, and as if the company had a partnership or LLP.

An example of the proposed new system is if Mr & Mrs X each had a 50% share of the capital of their own company and their company made a profit of £120,000, there would be no corporation tax liability, however, they would still have to pay tax on their £60,000 share – whether the money was distributed to them or not.

The government felt that shaking up the current tax system in relation to micro entities would even out the way a small limited company was treated in relation to tax when compared to the tax liabilities of an unincorporated business.


Protected Asset Status

However, reviewing the tax system isn’t the only thing the Government is currently weighing up. Both the Government and the OTS are also considering whether the introduction of protected asset status for unincorporated businesses, to align the owners and shareholders’ responsibilities, would be beneficial. Whilst the viability of new rules is still to be investigated by the OTS, it has the potential to affect a great number of businesses. In fact, both scenarios, if they come into force, may have an impact in tax terms that may be unfavourable when compared to the current tax system. However, as the recommendations from the OTS are yet to be revealed, it is too early to determine, or indeed predict, the outcome of the findings and the subsequent level of impact that this will have on businesses that are likely to be affected.


Without doubt, both of the above proposals have the potential to have massive implications in terms of tax liability for your business and we will continue to update you as soon as we find out further information.


Potential new look to tax system for small companies

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Potential new look to tax system for small companies