OPINION: Simplify the tax rules and let UK smaller businesses thrive
There’s been plenty of talk recently about how exactly the fantastic new lifeblood of the united kingdom – and worldwide – economy is likely to be fuelled by smaller businesses. Emily Coltman, chief accountant to FreeAgent, talks about the way the UK’s tax rules may be holding back the country’s emerging businesses.
THE UNITED KINGDOM Government is actively encouraging start-up businesses, while major traditional banks such as for example RBS and Barclays are providing specific packages made to help fledgling ventures log off the bottom and prove successful in today’s financial state.
It’s a good idea in theory – this idea that entrepreneurial flair will flourish because the skills of home based business owners and providers sweep through industry. But although Westminster would dearly want to see a large number of successful new businesses being created through the entire country each day to drag the economy out of its downturn, the truth is that many of the businesses will undoubtedly be hindered by the united kingdom’s draconian tax regulations.
Tax is really a complex issue, for certain, but periodically it really is too complicated – certainly with regards to running micro-businesses. At this time, tax rules can be quite intricate and companies could find it confusing when attempting to adhere to every one of the various regulations that they need to meet when filing their tax return.
The primary problem is that we now have way too many taxes for small enterprises to try and stick to top of. For instance, even the smallest sole trader or freelancer whose profits are below £5,000 each year has to consider income tax – and when their profits exceed this, they need to take Class 2 and Class 4 National Insurance into consideration aswell.
If the business enterprise grows further, you must work out whether you need to pay VAT – and make an effort to reach grips with the large number of rules and requirements for VAT registration and assessment. And, needless to say, if the business assumes any employees, then there’s also PAYE and Class 1 National Insurance to take into account, along with the National Minimum Wage.
To help expand complicate matters, if your organization is really a limited company, it pays corporation tax on its profits rather than tax and Class 4 National Insurance, and you also’ll no more have to pay Class 2 National Insurance. The business is your employer, if you’re drawing an income from the company you will see PAYE and Class 1 National Insurance to take into account. Changing to this could be challenging in the event that you’ve been used to running your organization as a sole trader.
Furthermore, each one of these individual taxes are complicated within their own right – and them all have wrinkles and issues to cope with, which may be very counter-intuitive. For instance, many small enterprises will travel throughout their work and can claim expenses back with this travel. However, road tolls are beyond your scope of VAT if they are operated by way of a public authority, but standard-rated (20 percent) if they are privately operated.
For small company and freelancers specifically, this many tax rules can be an unwelcome distraction from the day-to-day necessities of actually running their business. Many of them are – quite rightly – more worried about providing the best service or product possible, targeting new markets and seeing their sales numbers rising, instead of completing overly complicated tax forms. Who would like to tear their hair out racking your brains on which expenses they must be claiming, or what restrictive rules they must be adhering to, if they want to keep their start-up business afloat?
The complex nature of the tax system could even be dissuading many would-be entrepreneurs and companies from starting their very own venture to begin with. After all, when you have to navigate miles of tax-related red tape – or pay a team of professionals to control your accounts and tax calculations for you personally – you then’ll be less thinking about getting the fledgling business idea off the bottom.
There were many rumblings lately about if the UK tax system ought to be simplified. this year 2010, Chancellor George Osborne even announced the establishing of a fresh body – any office of Tax Simplification – to be able to streamline the tax code, nonetheless it still have not helped make the tax minefield any easier for smaller businesses to navigate.
You may still find complicated tax rules around claiming certain expenses such as for example running costs of a house, or travelling, as well as the difficulty of distinguishing once the business owner and the business enterprise are one and exactly the same, so when they’re not.
We also now have a predicament where limited companies and limited liability partnerships (LLPs) suffer from the complexity of company law – and where many companies are constantly vulnerable to falling foul of complicated issues such as for example tax, National Insurance, VAT, capital gains tax, corporation tax and PAYE compliance.
Hiring assistance from an excellent accountant – to allow them to become a “business minesweeper” with regards to tax issues – could be a godsend and really help your small business or freelancer stay out of trouble. But wouldn’t it be easier to have a system set up where microbusiness owners can manage the essential number crunching themselves, and instead utilise their accountants’ skills as trusted business advisors?
If the federal government is truly focused on seeing a fresh generation of freelancers and smaller businesses leading the charge and taking the united kingdom on the highway towards economic recovery, it requires to supply some concrete support to be able to help these lenders thrive. Simplifying the tax rules would definitely be considered a good start.