Small unincorporated businesses: will 2012 see less tax red tape?

Small unincorporated businesses: will 2012 see less tax red tape?

Emily Coltman ACA, chief accountant at online accounting provider FreeAgent, explores the Office of Tax Simplification’s latest suggestions on how tax could be made simpler for small businesses.

Part of HM Treasury, the Office of Tax Simplification (OTS) has published a discussion paper on how tax might be made simpler for the smallest sole traders and partnerships.

They’ve invited these businesses and their advisers to give feedback, ready for a report and recommendations that they’ll publish ahead of the 2012 Budget.

Reducing red tape: how it could happen

At the moment, small businesses must prepare accounts under UK Generally Accepted Accounting Policies (or GAAP for short). This can involve a lot of complicated calculations - for instance, hands up all sole traders (accountants and book-keepers keep quiet!) who know what an accrual is?

Thought not. Anyway, why should you need to know? John, who takes care of our garden, didn’t go into business to be an accountant. He’s a gardener. I don’t know how to prune a rose bush and he doesn’t know how to post an accrual.

But strictly speaking, currently you (and John) should be preparing accounts under UK GAAP, carrying out all these complicated calculations, then working out your income tax and Class 4 National Insurance on the basis of the profit in those accounts.

Preparing accounts so that you can see how your business is doing is one thing (and a very good idea). But having to comply with the myriad rules of UK GAAP, for a small business, just makes it more likely that mistakes will be made. So the OTS is suggesting different ways to calculate tax for the smallest unincorporated businesses. Limited companies aren’t included because of the potential conflict with company law.

The OTS options are:

• simplified calculation of profit
• calculation of tax using a measure other than profit.

Let’s look at each of them in turn.

How simplified calculation of profit could work

Several further options have been put forward for this, including:

• allowing businesses to prepare their accounts on the basis of cash spent and received, rather than having to adjust for cash due in and out at the end of the year.
• For certain expenses, such as business use of home, allowing businesses to deduct a percentage of turnover from their profits, rather than the actual expenses incurred.
• similar to the above, but allowing businesses to deduct a flat fixed amount from their profits for certain expenses.
• giving businesses the option to treat the cost of small assets, say those costing under £200, as part of their day-to-day running costs, rather than claiming capital allowances on them.

Each of these has advantages and disadvantages – in brief, any of them would save time and effort for small businesses, but could result in a higher tax bill.

For example, if you were allowed to deduct one per cent of your turnover for business use of home, this would be good news if your turnover was £300,000 and your actual business use of home costs were £500. But it’s bad news if your turnover was £10,000 and your business use of home costs were actually £500.

How using non-profit measures for tax calculation could work

As an alternative to taxing profit, the OTS has suggested different options for tax calculation, some of which are already used in other countries:

• tax as a percentage of the business’s turnover rather than profit, similar to the UK’s flat rate scheme for VAT.
• a flat tax charge for “being in business” similar to the TV licence fee, which might vary depending on the business’s sector.
• “indicator based measures” such as taxing a restaurant depending on how many tables it has.

The big disadvantage with these methods would be that businesses that make losses, as many do in their first few years of trading, would still have to pay tax.

Which businesses would this apply to?

The OTS has said that these alternatives would only be available to the smallest sole traders and partnerships. As yet they haven’t said what “smallest” means, but they’re considering setting an annual turnover limit at £20,000, £30,000, or £73,000 (the 2011-12 VAT registration limit).

What do you think?

The OTS is very keen to hear from small business owners about these measures, so if you want to share your opinion with them, you can e-mail ots-smallbusiness@ots.gsi.gov.uk

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