The Office of Tax Simplification (OTS) recently published a series of recommendations following its simplification review of small company taxation (see OTS recommends simplifications for small companies, April 2016 newsletter). The review focused on incorporated businesses with fewer than 10 employees, known as ‘micro’ businesses, of which there are now some 4.1 million in the UK, with 1.3 million operating through a company structure.
Currently, the UK operates a corporate tax regime on a ‘one-size fits all’ basis, modelled on a traditional company, with third party shareholders and clear intentions for future growth. However, shifting attitudes over recent years have resulted in an increase in people choosing to contract their services to large companies, or by using platforms and other disruptive technologies, to obtain their work, rather than being an employee. This shift has, in turn, resulted in an increased need for the tax simplification for micro businesses.
One of the OTS proposals is the development of a new type of trading vehicle – a ‘sole enterprise with protected assets’ or SEPA, which would be capable of providing something akin to limited liability. The report notes, however, that whilst a SEPA should be able to provide protection for assets, it may not be able to provide the assumed enhanced credibility and formalised structure that incorporation provides. Incorporation provides the separate legal entity status that is so often required for many personal services companies to win contracts. It is acknowledged that the vast majority of potential customers in this sector will only award contracts to companies – the main reason given as perceived protection against employment law consequences.
Under the SEPA recommendations currently being examined, a self-employed individual would not have a separate legal identity, but there would be a provision for protecting his or her assets. These assets could include the individual’s home, any non-business vehicles and any other substantial assets. The tax treatment could continue to be as a self-employed sole trader under the existing system although equally another tax treatment could be applied.
A number of formalities that would need addressing are covered in the report, including:
- the business would be required to have its own bank account;
- annual accounts would have to be submitted, meaning the trading records would be public;
- whether accounting could be undertaken using the cash basis;
- any significant change in personal assets must be notified each year, including depreciation of assets; and
- whether the business would be labelled as a ‘SEPA’ in its trading name.
The cost implications of setting up the SEPA would need examining – these may vary depending on the value of the personal assets and whether an official valuation is needed.
Although this type of trading vehicle would no doubt provide a level of protection, lenders are still likely to require personal guarantees against business loans, which would lessen the impact of the protection.
The report also points out that a caveat may be needed where a sole trader works from home. The new structure would be based on the declaration of business assets, which are then the only assets at risk against creditors. It may be difficult to separate the business from the personal assets, in terms of protecting the home, unless, for example, there was a designated working area.
The proposals for a new SEPA rely heavily on simplicity, and the OTS notes that they will need to be fully assessed to ensure that this type of trading vehicle will be able to provide a simple form of protecting assets, a simple tax treatment and cash basis accounting. In practical terms, SEPAs will also need to be accepted by clients or customers and banks as a legitimate way of doing business. Most importantly, the model will need to provide an effective simplification in the system overall.
The OTS will continue its work on this subject and a response from the government is expected in due course.