New rules for micro businesses

From ICAEW

Receipts and payments and flat rate expense deductions

The Office of Tax Simplification (OTS) has published its final report, Small business tax review: simpler income tax for the smallest businesses, in which it recommends a simpler way to calculate the taxable profits of nano businesses. The report makes some suggestions which would represent fundamental change and simplification for many of the smallest businesses in the UK.

The natural and instinctive reaction of many professionally trained accountants may be a desire to preserve GAAP accounting at all costs. However there are a few points worth keeping in mind. The OTS proposals are aimed at the very smallest unincorporated businesses, which it refers to as nano businesses. These are businesses:

• With turnover below £30,000
• With little or no capital investment
• Not normally registered for VAT, and
• Probably with no employees.

They are usually sole traders without professional advisers and it seems likely that many of them will already use some form of ‘cash accounting’.

The key recommendations of the OTS are as follows:

• Receipts and payments, rather than accruals accounting, should be used to calculate taxable profits. Businesses would still have the option to calculate profits in accordance with GAAP.
• A series of flat rate expense deductions should be allowed to cover items such as use of home, mileage, telephone and internet, subsistence, laundry, postage and stationery.
• Immediate tax relief should be given for small value capital items by allowing them to be deducted as expenses rather than through the capital allowances system.
• Small amounts of private use of assets and services would be disregarded.

There are many ‘what ifs?’ to this. For example, there would need to be flexibility around businesses with fluctuating profits. The report suggests a ceiling of £40,000 before a business would need to use traditional computations instead. There would also need to be a period of grace to allow those businesses which grow enough time to make the transition into GAAP accounting. The rules for the new Universal Credit should reflect whatever basis is adopted for income tax and NIC. But this can all be discussed.

The immediate next step is that the Chancellor will consider the proposals and may announce a way forward in the March 2012 Budget