Arctic Systems: LLP’s can solve the problem

Posted on

Dennis Howlett has written a thoughtful review of my paper on small business taxation. Unfortunately, I think he misses quite a number of the points I made. So I'll clarify them. He says:

His solution to 'income splitting' of the kind common in small limited companies involves what I believe are unworkable measures but ones that make trading through a Ltd economically untenable. .... In France, the lowest level of investment required to establish an equivalent entity is €7,500. That is seen as a significant impediment to helping business get off the ground and has been a constant source of complaint by those seeking to set up in business. So at £20K I can envisage all sorts of howls from small business.

But that's not true. I'm offering every small business a better solution: an LLP which has lower admin and more flexibility together with limited liability which is available as readily as a limited company and at no more cost. There is no obstacle here: I'm lowering the burdens on business with all the gains remaining. That's a plus, not a minus. Why howl in protest in that case?

As for income splitting, Dennis says:

Richard then goes on to apply tests for assessing income splitting based upon:

i.Time expended;
ii. Evidence of management input e.g. attendance at meetings, client premises, emails sent, etc.;
iii. Evidence of key services supplied e.g. technical input,invoicing, project management, product sourcing, etc.

This is unworkable and unrealistic. Apart from radically increasing the administrative burden, it makes no allowance for innovations like value based pricing. Neither does it allow for those moments when, as I have found, my wife comes up with flashes of inspirational brilliance although she has very little to do with my business.

Again though Dennis has missed the point. My model is specifically designed to recognise those moments of brilliance. I suggest part of the net income of the company can be allocated for such enterprise input without challenge being allowed. That has to be better than the existing arrangement. And I make clear, anyone could argue for a different ratio: they'd just have to prove that it was appropriate. That's completely fair.

As further evidence that Dennis has missed the point I offer this:

I see Richard's approach to limited companies as at best discriminatory. It doesn't potentially allow for those small partnerships where - as is often the case - profit division is decided on a year to year basis.

Actually, my solution is not about limited companies - it's about LLPs, and it is offered precisely to allow this flexibility, and backstop position for those who don't want to keep records. That has to be better than what we have now.

In addition, this is wrong:

It is for example worth looking at at least one of Richard's other suggestions; that of imposing NIC charge on dividends.

I suggested an investment income surcharge, which is income tax, not an NIC charge. An income tax charge is much easier to collect, and has no upper limit.

So I welcome the contribution - but what I have suggested is much more subtle than Dennis has appreciated, I think. And it's that subtlety that makes all the difference. It creates the right instrument for the job: what we have no is the wrong instrument for the job, which is why the system does not work and lacks any subtlety at all.