The integration of Income Tax and National Insurance, sorting out National Insurance, simpler reporting and more consistent capital allowances are all recommended in the latest report from the Office of Tax Simplification (OTS). These measures would all help rural businesses.
At long last we seem to be recognising that National Insurance is a tax in all but name. Once that hurdle is passed, it should be straightforward to integrate employee contributions with Income Tax and do away with the artificial distinction between the two. The OTS Report includes a table which sets out clearly the confusion between the two in terms of the various thresholds which are used.
This would then allow the complications of Class 2 and Class 4 National Insurance to be sorted out. Currently self-employed people can pay both. Class 2 is paid on a flat-rate weekly basis, and Class 4 is based on profits, and payable with Income Tax.
The report also addresses the complications which can arise from whether trade is carried on as an unincorporated business (sole trader, partnership) or as a company. The choice of legal form should not be swayed by tax considerations, and the OTS report even goes so far as to suggest that the special way in which single-employee service companies are treated (so called IR35 arrangements) should be suspended while a new ‘Business Test’ is sorted out.
These measures could be particularly important to smaller unincorporated businesses. In 2007/08 there were 3.6 million unincorporated businesses on the taxman’s books, and 2 million of these had a turnover of less than £20,000 a year. You can be sure that a high proportion of these were very small rural businesses. The report suggests that these businesses might be taxed on a quite different basis, for example turnover with fixed expenses allowances rather than profit. However, the potential problems are recognised and the report draws a number of parallels with the current simplified flat-rate VAT schemes. More work is clearly needed here, and the report acknowledges this.
Those of us with an interest in the history of taxation (we happy few …) will be relieved to see that the report rejects a suggestion that the tax year should be aligned to 1 April rather than 6 April. To do so would be to sever the link with the change from the Julian to the Gregorian Calender in 1752 – a mere delay of 170 years from the Papal Bull proclaiming the change in 1582 while England was still in the grip of its Reformation period. The OTS rejects the change for less prosaic reasons, it would just be too complicated to implement.
Consistency in Capital Allowances would be very welcome to rural businesses. We have seen the limit on the Annual Investment Allowance cut drastically from £50,000 to £25,000. The OTS suggests it should be left alone for longer periods, and that businesses should be allowed to spread investment over two years. So for example a small contractor or haulier who wants to spend £50,000 on a second-hand truck has to claim a complicated combination of annual investment and plant and machinery allowances. The OTS proposals would allow this to be spread over two years, so writing off the cost that much more quickly for tax. This would be particularly helpful to small rural businesses whose capital expenditure is ‘lumpy’, that is to say they spend a large amount occasionally.
VAT might be a disappointment to some rural businesses. The OTS looked at conflicting proposals to either raise the threshold for compulsory registration radically, or to reduce it. They recommend it should be left alone, but they do suggest that VAT should be simplified for small businesses undertaking international trade. A general raise in the threshold would be a welcome flexibility for smaller rural businesses, leaving many more with the choice of whether to register for VAT or not. Not registering can be attractive to businesses which deal directly with consumers or with businesses that are unable to recover VAT themselves, whereas registration is a must for any rural enterprise mainly making business supplies to other VAT registered businesses.
The OTS hopes to see a response from Chancellor George Osborne in next week’s Budget. The report itself can be seen at: http://bit.ly/fFpDMF