The future of taxation for small companies

Many GPs now have a company set up, though which they will provide certain medical services alongside their main role.  We are also seeing more companies being set up providing medical services with increasing complexity in business structures.

 

But for Owner/Directors of a Small Company, The Office for Tax Simplification (OTS) have recently published a report outlining some potential upcoming tax reforms which could have significant implications if these become legislation.

 

The full report can be found on gov.uk website and, as this is 132 pages, I have chosen a particular item which I find intriguing.

 

The report outlines a potential new tax structure with the intention of simplifying the tax system titled “Look-through taxation”.  Essentially the company would not pay Corporation Tax on profits and this would, instead, be taxed directly on the members.  This profit would be apportioned between the members and incur Income Tax and National Insurance charges, in a similar fashion to a partnership.

 

As a simple example, suppose we have a company with one shareholder who receives a salary of £8,060 and the company has profits after paying the salary but before tax of £30,000 for the year ended 5 April 2017.  Assuming the company distributes the full amount of profits the following tax may become due:

 

Current tax structure “Look-through tax structure”
Company profit 30,000 30,000
Corporation tax (6,000)
Distributable profits 24,000 30,000
Tax charges
Salary 0 0
Dividends (1,204)
Company profit (5,412) income tax

(1,974) Class 4 NIC

Net income
Salary 8,060 8,060
Dividend 24,000 0
Company profit 0 30,000
Less: income tax charges (1,204) (7,386)
Total retained earnings 30,856 30,674

 

It is difficult to say whether this new tax structure would result in less tax to pay overall, although I would think this unlikely. Thinking about this another way, however, it may prove more beneficial in reducing the amount of administration.  The new structure would mean that all retained profits have already been taxed, so the shareholders should be free to withdraw their funds at any time, which could also have potential implications for the current legislation on directors’ loans.  It would also mean that, as soon as the company accounts are filed, HMRC will have access to this and will be able to tax the profits straight away, tying in nicely with the plans to abolish the self-assessment tax return and a move towards the digital tax account.

 

Before we get too excited at the prospect of tax simplification, I would point you towards the pension simplification in 2006 which, for GPs, transpired to create an even more complex and difficult to administer system.  Still, the idea sounds “simple” enough.

 

For more information, please contact Andrew Purcell.