Lords push for review of small business tax

The government is being urged to review the taxation of small businesses to
eliminate the tax benefits of employees working through service companies.

The recommendation is from the Lords Economic Affairs Committee after
reviewing the crackdown on Managed Services Companies in the Finance bill and
the previous IR35 initiative.

Peers were told by witnesses – including ICAEW – that what Treasury ministers
were doing amounted to ‘sticking plaster’ legislation papering over obvious
cracks , but that their approach ‘does little to address the underlying
structural difficulties in the UK tax system that give rise to the problem’.

The report said the Treasury’s approach was to try to unmask the real
employment relationship underlying many service companies and deal with the
issue as a compliance problem.

But the committee warned: ‘There can be no satisfactory resolution of the
issues raised by personal and managed service companies without tackling the
underlying structural issues, however difficult they may be to resolve’.

It called for ‘structural changes to reduce the differences in outcome in
terms of tax and NICs payable whether an individual is employed, self-employed
or operating though a company’.

Tory chairman Lord Wakeham said: ‘More action is needed to level out tax
rates for employees and the self-employed to discourage people misrepresenting
their true employment status to achieve tax benefits.’

The wide ranging report on the bill avoided the rates of tax – the Lords has
no power over taxation – but it also urged new criminal investigatory powers
proposed for Revenue and Customs should be subject to ‘stringent monitoring’ on
how they are used.

Peers demanded annual reports to parliament and called for the early
introduction of safeguards, with consideration of a taxpayers’ charter. The
committee also called for rights of appeal against imposed penalties and an
informal dispute resolution process.

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