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An interim report looking at small business taxation has been published by the Office of Tax Simplification (OTS).
Merging income tax and National Insurance, the future of IR35, HMRC’s procedures and a simpler regime for the smallest businesses are all addressed in the recommendations.
The report analyses a range of elements of small business taxation, identifying problems and suggesting ways forward.
According to the OTS, the integration of income tax and National Insurance, including reducing the differential between rates applicable to different incomes and legal forms, could remove much of the pressure on the employment and self-employment boundary and should result in the IR35 legislation becoming obsolete.
If significant changes were made, the OTS acknowledges they would require legislation and immediately add to the burdens on small businesses. One of the key findings of the report is that complexity for small firms stems as much from the volume and frequency of change as the complexity of legislation or procedures.
While curtailing change would deliver simplification in many ways, introducing an alternative approach for small unincorporated organisations is worth exploring, to take away many of their administrative burdens.
The OTS recognises that the timescale to introduce the major structural changes above may be lengthy; the report suggests changes that could be introduced within a relatively short timeframe to help ease some of the burdens on small businesses.
The areas include:
- enhancing elements of HMRC administration;
- choice of legal form;
- simplifying reporting requirements on reimbursed expenses and benefits for employees;
- improving the capital allowances regime; and
- considering a simpler VAT system for small businesses that undertake international activities.
With regard to the IR35 legislation, as already mentioned, integrating income tax and National Insurance would take away the need for IR35, but in the meantime, the OTS recommends two options that the government should consider:
- suspend IR35 with the intention of permanent abolition, using the period of suspension to investigate behaviours and costs; or
- keep IR35 legislation unchanged, but improve the way it is administered by HMRC.
A third alternative would be to consider the introduction of a new business test, with the aim of reducing the size of the population potentially caught by the IR35 legislation and thereby remove a large number of contractors from the worry of a potential IR35 enquiry.
