It’s not the complexity of corporation tax behind £10.9bn of it (apparently) not reaching the Revenue

There’s a lot of unconvinced folks when it comes to HMRC’s tax gap data and I’m not convinced either, insofar as I don’t think corporation tax is a nightmare for small company directors – and the latest dataset from the Revenue sort of implies it is and as a result it’s dodged or not paid, writes Anthony Mellor of chartered accountancy firm Mellor & Co.

Our loved/loathed, heavily legislated against limited company is the real issue

Rather, the challenge with corporation tax (its share of the tax gap increased from 17% in 2018-19 to 34% in 2022-23) isn’t as terrifying for small company directors as it is often portrayed.

Instead, the real problem lies in the very concept of a ‘limited company’ and other registered entities at Companies House having their own, separate, legal persona. This concept creates an artificial entity that operates independently of the individuals who manage it, making the tax landscape more complicated.

The complexity of legal personas

The notion of a company as a separate legal entity means it functions similarly to a non-sentient individual. It's controlled by shareholders and directors, but this abstraction can be hard to grasp and manage.

This separation is further complicated by IR35 and the Off-Payroll Working (OPW) rules, which emphasise the idea of being "in business on one’s own account."

How do I approach it in the contractors we advise? At the risk of being accused of being very boring I never let pass by any incorrect use of the terminology. So for example when a contractor speaks of ‘getting a new job,’ I repeatedly explain that their new contract is not a new job, and that it is a contract for which his or her company is signing up - not himself/herself. This is despite the fact that it is their personal name signed on the contract!

Whose money is the money a personal service company makes?

Advising on these concepts in a clear and accessible manner is difficult, partly because they are apparent contradictions in the eyes of the unsure.

For example, I can quite see that when a business owner takes money out of his or her company, they regard it as their company and therefore their money. As such, the individual new to PSC working is more likely to be expecting to have to pay income tax,  rather than having to account for the corporation tax that first comes off the top.

So advising, or even writing about this issue requires constant emphasising to our clients – and you contractors actively reminding yourselves too please -- of the separation between the individual and the company.

Another dollop of confusion

Similarly, a common misconception among first-timers is that being ‘in business’ means being self-employed.

However, directors and shareholders often find themselves straddling two distinct tax profiles: one for their role as an employee and another for their stake as shareholders.

This dual role creates a dollop more confusion and uncertainty because, clearly, there’s not enough to go around already!

Double taxation confusion

It should be noted here that historically, the UK government insisted that they would never tax company profits twice.

Yet today we  have a different scenario. Despite the opposite position from officialdom for decades, there is no longer any credit for corporation tax paid. It means that funds viewed as the same money or profits are being taxed twice, causing resentment, frustration, and because it’s obviously in astonishingly short supply; even more misunderstandings among small business owners! In short, people new to a limited company don’t always expect what they see as the same money or profits to be taxed twice.

The iXBRL hurdle

A further word, if I may, with such taxpayers in mind. Despite HMRC’s long-claimed ‘tax doesn’t have to be taxing,’  while an unrepresented self-employed taxpayer can indeed still file their own tax return, it’s no longer an option for companies due to the requirement for incorporated businesses to file iXBRL documents.

This type of document is simply beyond the skillsets of the typical small company owner, although an explainer on iXBRL format  from HMRC indicates it shouldn’t stop you at all! It’s worth checking out the explainer for the helpful glossary of terms, if nothing else.

CT versus CGT, IHT, NICs? There’s really no contest in a simplicity contest

To conclude, while many accountants and commentators will forever take issue with HMRC’s methodology behind its tax gap data, I beg to differ about corporation tax itself being problematic.

While I take the point about the corporation tax deadline of ‘nine months and a day’ lacking the regularity of every January or July 31st, corporation tax itself is really very simple. To work out your CT bill, simply take your profit and multiply by a precise percentage (whichever category of percentage said-profits fall into). Capital Gains Tax; Income Tax, Inheritance Tax, National Insurance Contributions – none of those four are as simple as CT, in this regard.

Finally, the April 6th 2023 corporation tax hike hasn’t helped…

My view is that although the increase in the percentage of corporation tax you (potentially) pay HMRC since April 6th 2023 is likely a factor in explaining the corporation tax gap increasing to a swingeing £10.9billion, having increased from 11.4% of the tax gap in 2005-06 to 13.9% in 2022-23, the root of the problem stems from the fundamental limited company structure. 

Proper education and a consistent approach to terminology can help here, but it remains an ongoing challenge. Personally speaking, I’ll be doubling down on making sure the clear distinction between roles and taxes is understood, while demystify the limited company taxation process for small company directors as much as possible to mitigate some of the complexities that they face.