Could the tide be turning against the tax benefits of incorporation?

The Telegraph reported this weekend that Moira Stuart, the current face of HMRC’s Self-Assessment campaign, is charging for her services via her own service company, allegedly to pay tax at the lower 21% corporation tax rate rather than the 50% top income tax rate. Coming hot on the heels of the Ed Lester and the Student Loan Company scandal, where a similar company was used apparently used to avoid top rate tax and national insurance, it is clear the media spotlight is now focused on the potential tax advantages of running a business through a company.

Whilst anti-avoidance measures are in place to counter the most blatant use of personal service companies, the fact is that with reducing corporation tax rates and increasing national insurance it has become ever more tax efficient to incorporate a small business over recent years.
Tax saved by operating a business through a company compared with a sole trader:

We will have to wait to see whether George Osborne will respond to the current media attention to this matter, but I think it likely we will see some measures taken in the near future to level the playing field between the incorporated and the unincorporated small business.

One route would be to increase corporation tax for small businesses, perhaps by scraping the small companies’ rate, although this would be politically difficult for a pro-business conservative Government. Alternatively, HMRC may revisit the possibility of applying national insurance to dividends for small companies.

The difficultly that all governments face in dealing with this matter is not some much to do with levelling the playing field between the incorporated and unincorporated small business, but it is how to do this without encouraging many employed individuals to try to reclassify themselves as self-employed. At the moment however, it remains a legitimate and potentially tax efficient option to incorporate a small business.