Small Business Tax Nightmares

Working out your tax in any jurisdiction is bad enough. I have lived in the US, UK and Canada at various times and have had a taste of doing personal tax returns in all three. All three tax regimes appear over complex and fraught with risks of errors and penalties, even for the expert. Compliance is extremely onerous or expensive (usually both) to comply with. The pain of the US system is tempered only slightly by generally lower taxes.

Now with a small company doing business in all three I am just about to throw up my hands and surrender and ask why anyone would subject themselves to such agony. One particular annoyance we have found is the way US limited companies (LLC's) are treated. In the US they are partnerships with income taxed at the individual partner level. Canada and the UK view them as companies taxable at the corporate level. The outcome is that double taxation can be suffered by LLC's operating in the UK or Canada. There is no relief to be found in the tax treaties.

This is great for expert tax practitioners charging premium hourly rates who advise on optimum corporate structures. However, such experts are often unaffordable for start-up and small companies. The risk is on the business and its owners who want to get on with business and not spend half their time bogged down in a tax quagmire.

Why cannot the tax authorities should take a more pragmatic, flexible and fair view of such situations? This would not necessarily result in less tax being collected - perhaps more if people have more time to get out and earn revenue in their businesses. It is the honest people who often end up being screwed tax wise. What would be the harm in the Canadian and UK tax authorities being able to view LLC the same way as the US in the name of fairness? Why does the risk fall totally on the small business person? Of course large tax bureaucracies have grown up whose existence is, partly at least, justified by creating, constantly changing and enforcing a huge body of complex rules and regulations.