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Small business tax needs overall ‘reform’

The government has been urged to produce a wide-ranging review of small business tax ahead of the next Budget.

The call came from the Chartered Institute of Taxation (CIOT) as part of its 2009 Budget representations.

The CIOT welcomed the government’s decision to defer proposed legislation on income shifting, where owners of a family business take low salaries and distribute the firm’s income between themselves through dividends as a way of reducing the tax liability of the person who generates the majority of the earnings.

Ian Menzies-Conacher, chairman of the CIOT’s Technical Committee, said: “Any attempt to legislate for income shifting should be limited to a simple set of rules, without creating additional burdens.”

However, the CIOT also argued the case for examining small business tax “in the round” as opposed to limiting reform to just one, complex area.

In its representation, the CIOT put forward the case for integrating the National Insurance and income tax systems.

It also said that there is an urgent need for the UK to adopt a comprehensive statutory residence test that is easily understood and is readily workable by employers.

The CIOT welcomed the ongoing consultation on a taxpayers’ charter.