Landlords were this week hoping for a row-back on some of the property tax measures introduced by George Osborne, but none of that. Instead there were hints from Philip Hammond that the government is concerned about the number of self-employed and small businesses, which includes property and buy-to-let businesses, incorporating to reduce their tax liabilities.
Acknowledging that he had been both self-employed and an director of a limited company himself, the Chancellor made specific reference in his Budget statement to the setting up of companies to reduce tax liabilities, a strategy currently being adopted by many landlords following the phased removal of mortgage interest tax relief, starting from next month.
Mr Hammond’s exact words were:
“We must ensure that our corporate tax regime does not encourage people across the economy to form companies simply to reduce tax liabilities, pushing the burden of financing our public services onto others. HMRC estimates that existing incorporations cost the public finances over £6 billion a year and the OBR forecast an additional annual cost to the Exchequer from those choosing to incorporate of £3.5 billion a year by 2021-22.”
On possible move by the Government on corporate taxation for smaller businesses, hinted at in a previous Budget statement, would be a move to Look-Through Entity?
The Chancellor last year announced that the Government is considering the introduction of a completely new system of small company taxation – a “Look-Through Entity” model and has 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. The regime 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 the owners each had 50% of the share capital of Positive Property Limited, and the company made a profit of £90,000, there would be no corporation tax to pay but they would each be taxed as individuals on their £45,000 share, whether or not that amount was distributed to them.
The theory is that Look-Through would level the playing field between the taxation treatment of a small limited company and an unincorporated business but there are many pros and cons. The Government and OTS are also looking into protected asset status for unincorporated businesses to align the owners’ liability with that of limited company shareholders.
What is Look-Through Entity?
Look-through or flow-through entity is a legal entity where income “flows through” to investors or owners; that is, the income of the entity is treated as the income of the investors or owners. This structure can avoid dividend tax and double taxation because only owners or investors are taxed on the revenue. Technically, for tax purposes, flow-through entities are considered “non-entities” because they are not taxed; rather, taxation “flows-through” to another tax return.
Key questions for property investors: if look-through entity is introduced, would this be optional or compulsory on smaller company owners, and what of tax reliefs, such as interest on loans, only available to companies and not to sole traders or partnerships? Should these be available, as the expenditure is by a company? Or not because the entity is not being taxed as a company?
These are uncertainties anyone considering incorporation has to deal with. Seek advice from a qualified tax accountant before making any decisions.
Chancellor hints at limited company clampdown https://t.co/DesP4rxWZT
— LandlordZONE (@LandlordZONE) March 13, 2017