Simplifying income tax for small businesses

Credit to Ayla87 @

This was trailed in the 2012 Budget and proposed details were issued last week in a consultation document. The simplified tax system for businesses with a turnover of up to £77,000 p.a. could find its way into next years’ Finance Act.

Qualifying businesses

The proposal only applies to unincorporated ‘nano’ businesses of which there are currently some 3.5m in the UK. Some will be excluded from participating such as authors, financial traders, property businesses and limited liability partnerships.

Cash is king

The system will work on a simple ‘cash in cash out’ basis with some actual expenses being replaced by a flat rate allowance (e.g. use of home/car for business). Once an election has been made to use the system it will not be necessary to exit it until turnover exceeds a surprisingly high £150,000.

The choice is yours

The new system is voluntary so it will be possible to calculate whether the simplified cash basis will be advantageous. Once a business has opted in it is not yet clear how opting out will work. The year in which a business switches regimes may be challenging as new transitional rules will need to be respected.

Simplicity itself?

The cash basis will still involve some calculations. Non business use of assets will need to be adjusted for as will disallowed or ‘excessive’ expenditures and the costs of ‘more durable’ assets. Perhaps confusingly those registered for VAT are to have receipts and expenditures included in the ‘cash in cash out’ tax calculation. It will only be possible to carry forward losses under the cash basis which may not suit many, for example those who are starting self-employment for the first time or others wishing to use sideways loss relief.

Existing businesses opting into the cash basis will need to examine the difference between accrual and cash accounting for at least the first year of cash operation and make the correct adjustments.

What are the ‘fixed allowances’ to be?

The proposal includes fixed mileage for cars (45p per mile etc.) to replace the costs of vehicle ownership, a flat rate of between £8 and £24 per month for use of home rather than actual costs and flat rate disallowances (e.g. £500 per month for two persons) for personal use of business premises.

Simplified systems in other countries

Many other countries, such as Germany and Austria, have simplified systems for smaller businesses, which allow cash accounting for tax purposes at far higher levels of turnover. South Africa introduced a new system in 2009 but it has only had a take up of 10% indicating that design is crucial.

Will it be worth it?

Whether a business will benefit from the system is down to its individual circumstances. It will be necessary to determine which system will be cheaper, taking into account administration savings. The irony, of course, is that this process itself will add to the administration burden of nano businesses.

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