In the March Budget it was announced that the Government are considering the introduction of a completely new system of small company taxation and have asked the Office of Tax Simplification (OTS) to consider this possible new system in more detail.

It is proposed that the new system, if introduced, would apply to micro-entities with 9 or fewer employees and would tax shareholders directly on their company profits in proportion to their shareholdings as if the company was a partnership or LLP. For example, if Mr and Mrs Bloggs each owned 50% of the share capital of Bloggs Trading Ltd, and the company made a profit of £120,000, there would be no corporation tax to pay but they would each be taxed on their £60,000 share whether or not that amount was distributed to them.

It is felt that this would level the playing field between the taxation treatment of a small limited company and an unincorporated business. The Government and OTS are also considering the introduction of protected asset status for unincorporated businesses to align the owners’ liability with that of limited company shareholders.

Both proposals may have significant tax and commercial implications for your business and we will keep you posted of further developments.