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Tax system needs a revamp.

Over the years, governments of various persuasions have claimed that they are 'small business-friendly' because of the tax advantages they have introduced for small firms.

This is true, but only to a limited extent - limited company, that is.

While the tax burden for limited companies has steadily fallen, and for small incorporated companies, the self-employed are still paying tax at 23% or 40%.

Governments need to understand the difference between unincorporated businesses (sole traders, partnerships and the self-employed) and incorporated firms (limited liability companies) because there is little evidence that they understand the different tax schemes that currently exist.

The self-employed are not the huge wage earners commonly perceived by many people. According to Inland Revenue statistics, the average income from self-employment is not much more than pounds 12,000 a year, while average earnings from employment are over pounds 18,000 a year.

This is why the whole tax system should be revamped to make the situation more favourable for the majority of small businesses, that is those that operate outside limited company status.

Reducing tax rates for companies potentially only benefits around 30% of businesses operating in UK, leaving the majority of small enterprises out of the equation.

Most individuals setting up in business are self-employed, not incorporated and there has been a growing trend towards homeworking and teleworking. But they have no legal status of their own.

What happens is that individuals set up businesses offering their services for employment. This works very well until the State alters that status. The individual is then forced to take on the state to reverse that decision.

The onus should be reversed in that there should be a clearly registered intent to be self-employed, but then within a given timespan and on specific issues the State would have a right to challenge that status.

Repeated - and oft-failed - attempts by the State to tackle any abuses have only tinkered piecemeal with the issues involved. The IR35 rules and the provisions of the Construction Industry Scheme are two recent examples.

IR35 is an attempt to clamp down on personal service companies. These companies are a well-trodden path for entrepreneurs. Individuals undertake contracts and hire themselves out through their own service company.

The company then issues bills for the work undertaken and receives the money without deductions. This enables individuals to manage their own tax affairs and to pay themselves dividends from the company's profits.

Such companies are especially common in the IT sector. It is a surprise the government targeted such companies as it professed to support the 'knowledge-based economy' and its industries.

The Construction Industry Scheme is another example: under CIS, 'contractors' are required to inspect certificates from the Inland Revenue before they can settle invoices.

This scheme is tantamount to a license to trade, due to the Revenue's view of large construction firms as those with satisfactory tax records compared to its distrust of small businesses.

The scheme restricts the availability of tax exemption certificates to applicants with a certain turnover threshold, and subject to having paid all their taxes on time over the previous three year period.

The bureaucracy surrounding the scheme is also heavy and unfair to small businesses. Small construction businesses are issued with a CIS6 certificate that has to be produced in person to customers, which can mean huge amounts of travel being undertaken, whilst large construction firms do not have to perform a similar task with their CIS5 certificates.

The point is that small businesses, from the tax system to regulation, really do need to be treated differently if they are going to be the 'engine room of the economy' that we all expect them to be.
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Copyright 2004 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Business
Publication:Western Mail (Cardiff, Wales)
Date:Jun 30, 2004
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