Business News
Large or Small, Tax is for All
The number of businesses trading beneath the VAT threshold has doubled in the last 25 years. With 2 million turning over less than £20,000 and 1 million less than £70,000, the small business is no longer able to hide behind the big brands and the sympathy of filing their own complicated tax returns with less chance of HMRC checking on their credentials against the big boys.
Tax law and practice applies to the small businesses in equal measure to their larger counterparts and so states that their accounts should be prepared in full accordance with debtors, accruals, prepayments and work in process or GAAP as its known, and all necessary tweaks should be carried out for tax purposes. The fall down occurs where the tax returns carried out by nearly half of small businesses who do not use agents to assist them, are not compliant with GAAP, and moreover do not know what it means and its implications if brushed under the carpet. Many submit their three line accounts, often in two lines, claiming no expenses and thus bypassing the complicated, accurate version of the three line return.
The Office of Tax Simplification (OTS) has emerged with new ideas on this and thus ways to simplify and ease the difficulty of completing tax returns for the smallest of businesses in a document released with one other on possible disincorporation relief (that’s a whole different article!) from their think tank. They were careful to consider that whilst not all suggestions raised in developing the document may not sit so comfortably within the UK tax system, they were equally mindful to release the findings and ideas following considerable discussion resulting in two main alternative approaches to the current system. Working to either a simpler approach to the calculation of profits, or looking at taxing something other than an accounting profit, the possibilities for the latter as listed below;
· Taxing against a flat rate charge on the business, similar to a television license fee where you are charged a single fixed fee for owning your TV, being in business will incur a similar charge, which is a system already being used in a number of Central and Eastern European Countries.
· Focus on turnover as done in France, South Africa and Poland, with variations such as adjusted turnover, an example of which removing employment related expenditure and instead, use a previous year’s profit figure which is then uprated by a specific amount.
· By using “indicator based” measures, a tax charge can be fixed by reference to numbers of practicalities within the business, such as number of tables in a restaurant, employee headcount and the footprint of the business premises for example. This is a practice again already adopted in Poland and Spain.
These of course are just ideas at present, and the OTS is keen to make readers aware of this – none of the suggestions have become anything close to a proposal for legislation, with many members of the advisory committee wanting nothing to do with a second proposal.
The UK has not always been in the dark on such practices; until the 1940’s farmers were taxed on the value of their land and estimates were simply just accepted by small businesses as dished out by the Inland Revenue, though common feeling these days is that the process is much better these days.
Simplification is the other option, which includes cash accounting – looking at the abolition of the distinction between capital and revenue. In truth, most small business would seem to use the first whilst the AIA successfully provides the second, so it would therefore pose little use in spending legislative time on changing the system for these, and it is the changes to the system that small businesses have so little time and appreciation for.
The simplification idea has another element by allowing fixed sums on small expenses; however this is not an entirely new idea for the smallest businesses that can currently work to a figure of £3 for such expenses, and prepare motoring costs based on mileage.
All this said, the challenge now is for those most mentioned and affected, the small and smallest of businesses, to see this paper and make themselves heard for their ideas and contributions. The OTS is keen to hear from them, and in particular those most unrepresented and often the more elusive business owners. There will be seminars and workshops being rolled out in September and October; however the headcount at these events remains to be seen, as many that would be most affected have not seen the research paper and are unlikely to without being prompted.
Whilst the document has been commended by the Institute of Directors as per good old Google, the irony is that they are large companies for which the suggestions have no effect, and mainstream press has not picked up on this report either. Those that need to listen most are those that will not be joining the local Chamber any time soon, or spending precious funds on a £100 membership to the Federation of Small Businesses, and thus have the least exposure to ideas such as these.
