Consultation for simpler income tax for SMEs opens

The Government has opened a consultation document regarding income tax simplification for small businesses, including the introduction of a 'cash basis' for tax calculations and simplified expenses, following announcements made by George Osborne in the Budget.

The consultation builds on an earlier Office of Tax Simplification (OTS) review published at the end of February that proposed small business with a turnover of up to £30,000 should be eligible to pay tax on cash profits rather than full accounts.

The Government is considering extending this to match the VAT registration threshold, meaning self-employed sole traders or those in a partnership with a turnover of less than £77,000 for 2012/13 will be eligible, with a possible further extension providing sales reach no more than £150,000 a year.

Small businesses and sole traders currently have the same rules for working out profits and the amount of tax owed as multinational corporations.

It is estimated that more than three million businesses in the UK with a turnover below £77,000 will benefit from the simplifications.

The Government's consultation is proposing:

  • Small businesses to be taxed on a 'cash basis' rather than lengthy calculations designed for bigger businesses. This would mean that tax is only paid when cash is received and decreased administrative burdens such as the eliminating the need for stock records and understanding capital allowances.
  • Simplified expenses for smaller businesses with a clear distinction between business and personal expenses. This would implement a standard rate for claiming expenses such as standard mileage rates for business use of cars, and a flat rate expense for business use of homes, and personal use of business premises.

The Government expects the cash basis to decrease receipts by approximately £420 million in 2015, although the final costing will be subject to scrutiny by the Office of Budget Responsibility (OBR) and will be set out in Budget 2013.

The consultation document is open for comments until 22 June and, providing no serious concerns are raised, the cash accounting basis is expected to be implemented for firms trading up to the £77,000 VAT threshold due in April 2013.