As one contributor on AccountingWeb asked: ‘Surely a Conservative Government didn’t just launch the biggest raid on small business owners in living memory?’
Two measures in particular: the change to dividend taxation and Employers Allowance (See Budget Report for details), affect a particular profile of business owner – namely owners who are sole Director and employee of a Ltd Company.
By our estimate the average business owner in this situation will need to find an extra £2k income to maintain their income from April 2016.
One immediate consequence of the changes is that the tax benefits of operating through a Ltd Company vs Sole Trader have disappeared for a large number of small businesses. At Crunchers our rule of thumb was that when taxable profits rose above £25k there was a financial advantage to being incorporated even taking into account higher accounting fees and extra admin.
From Apr 2016 the tax advantage for trading through Ltd Co will be much less obvious and in many cases non-existent. Certainly Ltd Co will continue to allow Company Directors to choose when profit is withdrawn to avoid going over higher rate thresholds, but the benefit is much less clear cut.
From next year, the decision regarding whether or not to incorporate a business will become far more about some other considerations:
- Does the business need limited liability?
- Does the business need a flexible vehicle for outside investment?
- Does the business need the added accountability and therefore credibilty that statutory regulation provides?
In our opinion, therein lies a silver lining for small business.
The Ltd Co structure is an administrative burden and can be a distraction to growing a business. At Crunchers we have long argued that it is far more important to concentrate on making a business profitable.
The government is in fact promising to streamline small business admin and to its credit has been taking steps to deal with some of the tax avoidance that is available to multinationals, thereby leveling the playing field for small business.
In the background we sense commitment for a streamlined tax system with a level playing field in terms of tax for Sole Traders, Ltd Companies, Multinationals. Perhaps that is a vision we can support after all.