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Why the current system of business taxation is confusing

Posted: 23 May 2013 in Blog

To begin - I have a question. 

Do you find the current system of taxation confusing and unclear?

For me the system has two major faults:-

  1. the system is too complex and is not transparent
  2. it creates a two-tier system between different sizes of businesses

If you start in business the general consensus is that you should hire a good accountant to make sure you pay the minimum possible tax and to help you through all the tax and reporting regulations.

Among the questions you have to ask when you set up in business – should I be a sole trader, self-employed or set as a company.  Also what’s the difference between these? Most importantly which is the right one for you? Also if you are going into businesses with other people you need to consider about a partnership or even a limited partnership.

When you do decide what structure you will trade through you need to find out what who you need to inform and when. You also needs figure out what has to be reported, to whom and when

Then as you grow and you need to employ others. If you have never employed anyone you need to figure what you need to do. You need to give a contract of employment, train them, think about health & safety, insurance. Then you also have to figure out what you have to report and pay to the HMRC .

Once your turnover grows you have also deal with what happens when you the reach the VAT threshold?

So many questions and things to do! And do the UK government make it easy? Simple answer is no.

The system is confusing and opaque. Ask two accountants and often they will give different advice or worse still contradictory advice. I recently had an enquiry from a new business and they asked a question about VAT. When I gave an answer they seem bemused. When I asked why? - they said that mine was the third different answer from four accountants they had spoken to.

If you ask your friends – each will explain differently what the rules are and how they are applied. There is a lot of anecdotal information out there – much of which is based on outdated information and old rules

Let’s take one simple question – am I, as a Chartered Accountant, self-employed or an employee?  You would think that this would be easy to determine.  Unfortunately it is not.  Even the HMRC cannot give a simple set of precise rules. There is guidance on their web-site. But you are not able to phone them or email and get a quick and definitive yes or no. They do have a tool (ESI) but as they say on their own site the answer is not binding on them

Once you have set-up your business you have to figure out what expenses are deductible and what are not.  Again the rules may seem confusing; you have to figure out what are expenses and then what is capital.  There can be many questions, for example (and this is nothing like a complete list):

  • Can I do my accounts on a cash basis
  • How do I treat expenses that are part personal and part business
  • How do I treat a customer that has not paid in my accounts
  • When can I write-off a debt
  • Can I charge the business for costs of my home
  • Can I charge for the cost of going from home to work
  • How do I calculate depreciation
  • How do you  treat small items of capital

This list is not meant to be exhaustive!

I said at the start of the article that the current system creates a two-tier system. Why did I say that?

Well in my view there are two groups of people in business: firstly those people that operate as sole traders or self employed. They tend to do their own accounting and may often do their own tax returns. Even when they use an accountant there is little tax planning done. The second group are those that operate through limited companies. Because the reporting requirements are more complex an accountant is needed. They tend to pay a lower percentage tax on the same income than if they were self-employed. This is because of the way companies and dividends are tax as compared to being that of those who are self employed.

If you are self-employed and making a profit of £30,000 or more it is likely that you can reduce the taxes you pay by setting as a company. If you want to find out more and see whether you can save money by paying less tax please feel free to contact me.
 

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Tax Rates

Income tax2013-142014-15
Tax-free personal allowance (under 65)£9,440£10,000
Basic rate: 20%£0 - £32,010£0 - £31,865

Higher rate: 40%(dividends: 32.5%)

£32,011 - £150,000

£31,866  - £150,000

Additional rate: (dividends: 42.5%)

Over £150,000

(45%)

Over £150,000

(45%)

Capital Gains2013-142014-15
Annual Exempt Amounts for individuals£10,900£11,000
Corporation tax (rates for financial years starting on 1st April)20142015
First £300,00020%20%

Next £1,200,000

23.75%21.25%
Over £1,500,00023%21%

Tax credit on dividends (basic rate taxpayer)

10%10%
Approved HMRC mileage ratesFirst 10,000 business miles in the tax yearEach business mile over 10,000 in the tax year
Cars & vans45p25p

Motor cycles

24p24p
Bicycles20p20p

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