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The model aims to provide sole traders with a level of limited liability, whilst retaining the more simple form of tax and regulatory regimes they currently enjoy.
OTS’s rationale is that limited companies are incorporated for a number of reasons, however, the most common reason is to benefit from the protection that limited liability provides. Whilst being a sole trader is appealing to small business due to its simplified tax and accounting regime, having unlimited liability and the risk of losing the family home are major concerns.
What would SEPA provide to sole traders?
The SEPA model would:
It must be remembered that SEPA does not provide a sole trader with a separate legal entity, it is merely a model under which the sole trader will operate. A SEPA user would still be taxed as a sole trader, but would be entitled to carry on its business in the name of the SEPA.
The rise or fall of Entrepreneurism?
The OTS also states that the introduction of SEPA would encourage further entrepreneurism by allowing small businesses to operate without the threat of losing, what is likely to be, their most valuable asset.
This is an interesting view to take, given that in the last quarter of 2016, small and medium sized enterprises borrowed in the region of £6billion and yet around 80-90% of start-up businesses still failed due to poor cash flow management. This shows that the ability to obtain finance and lender confidence plays an important role in the rise or fall of start-up businesses.
Whilst the OTS has taken on board certain comments from the banking industry in its final report (mainly around the provision of unsecured loans), given the current financial market, the jury is still out as to whether, in reality, lenders will provide funds to a start-up businesses without being able to use the sole trader’s property as security in the usual way.
SEPA has the potential to be a useful simplification for those who may otherwise consider incorporation. The OTS is optimistic that it will provide a range of benefits to new business, however, the OTS should not under estimate the impact that financial borrowing has on the success or downfall of such businesses. The idea of protected assets may, on the one hand, be a comfort to borrowers and become a seed for entrepreneurialism, yet on the other hand, it may encourage a more blasé approach to borrowing and risk, resulting in lenders becoming cautious and restrictive when considering lending to a sole trader operating under the SEPA model.
We will be keeping an eye on developments.
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