Osborne embraces simplified tax accounting

Once he got past the introductory Labour-baiting in his Budget speech, one of the first things Chancellor George Osborne promised was a “modernised tax system”.

Drawing heavily on proposals put forward last month by the Office of Tax Simplification, HMRC’s proposals are very far reaching, aimed principally at the 30% of small businesses that do not presently use a tax agent.

Those companies that do use an agent will also be permitted to adopt the simplification proposals.

Accounts for tax purposes

There will be a new optional basis for accounts for tax purposes. The mandatory accounting requirements for small businesses will be abandoned and small businesses will be permitted to choose either a full accounting basis for tax purposes, or a simple cash receipts and payments basis instead.

Consultation will be start on this in the next week or so, and businesses will be invited to comment on the proposals.

The proposals make it clear that standard allowances will be introduced for business use of home and of a car.

There is no doubt that this will be a popular proposal for business owners, but possibly not as popular with accountants and tax advisers.

Other measures to be included in the small business tax system overhaul include:

  • Disincorporation relief - Suggested by OTS for incorporated businesses that  “change their minds” and want to go back to self-employed status. 
  • Business Tax Dashboard - From April 2012, businesses will be able to check online all of their taxes in one screen, by logging on to HMRC online services. 
  • Tax and NIC - The merger of the operation of PAYE and NIC will go ahead, and in particular the NIC paid by the self-employed is likely to be merged in operation (if not in name). 
  • Guidance and support - HMRC also announced a package of measures of support for unrepresented small businesses, including webinars, video tutorials which can be accessed at any time, and providing a tax ready-reckoner for small businesses to help them estimate their tax liability.
  • Service standards - HMRC announced some service standard targets which affect small businesses (and their agents). 

Continued...

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John R's picture

IR35?

John R | | Permalink

Any ideas where further information on this statement (found here in the IR35 section: www.hmrc.gov.uk/budget2012/ootlar-main.pdf ) might be available: "consulting on proposals which would require office holders/controlling persons who are integral to the running of an organisation, to have PAYE and NICs deducted at source".

I have a number of clients who were waiting to see whether there was anything adverse in the Budget before incorporating their private practice. Any thoughts?

or perhaps

oldersimon | | Permalink

The £77,000 threshold is in my view likely to sink this. The Treasury might have lived with possible losses for the very small business, but including all unincorporated businesses below the VAT threshold is probably too much.

Dashboard? Why only

Chris Wise | | Permalink

Dashboard? Why only unrepresented taxpayers, I can feel the wrath of payroll colleagues from afar.

 

No need for accountants to be concerned    3 thanks

jford | | Permalink

I've not read the details but any 'tax simplification plan' that introduces two ways of calculating taxable profits and allows you to choose which one to use sounds like something that will keep me in business for a while!

taxhound's picture

Simple?    2 thanks

taxhound | | Permalink

Now we have to calculate everything two ways (as with VAT FRS) to see which gives the best result.  Hardly a simplification.

petersaxton's picture

This is the problem with politicians    3 thanks

petersaxton | | Permalink

They have no understanding of small businesses.

Most of the small businesses I deal with are incapable of producing accounts properly using any basis and as was said above they wouldn't choose the simplified basis unless it saved them tax - they don't think about the accounting fees of working it out if it saves them tax.

Overstocking    2 thanks

Grantthechelseaboy | | Permalink

Does anyone else see this as a massive encouragement to small businesses to spend excessively, overstock and be more likely to fail as a result?

petersaxton's picture

Of course    1 thanks

petersaxton | | Permalink

This is what businesses will do to reduce their tax bill.

Politicians have no understanding. This is along the lines of Gordon Brown's 0% company tax band.

ChrisScullard's picture

Cash accounting has to be a    1 thanks

ChrisScullard | | Permalink

Cash accounting has to be a joke right?  Ever since I heard this earlier this afternoon ideas have been popping into my head about how to reduce clients' tax bills!!

Gone into the higher rate band just before the year end - bring forward buying some stock.  Or even give customers a discount for NOT paying until 6 April.

There would be more window dressing than in an interior designers convention!!

Also I can imagine the fun and games when this comes in - double relief for accrued expenses, no relief for prepaid expenses or capital expenditure.  And what about when a business goes over the threshold and has to account 'properly' again. 

This has all the makings of a farce.  But maybe a farce that will keep us busy!!

petersaxton's picture

Constant changes    1 thanks

petersaxton | | Permalink

I can see them changing the rules every year for a few years before they go back to how it was before they started meddling.

John Stokdyk's picture

@John R - IR35 provisions

John Stokdyk | | Permalink

I think the philosophy around these reforms is to steer small traders away from the incorporation route (though not professional practices, perhaps). But I shared your concern when I saw a bullet point about "Tax mitigation and IR35 ".

Still looking for details, but I think a lot of the things listed on HMRC's site hark back to previous announcements - in this case, an undertaking to review the operation of IR35 

Penalties

Trevor Scott | | Permalink

Just think of all the penalties HMRC will "earn" by investigating all the accounts prepared by traders themselves on a "cash basis". I'd bet the  "accounts" are utter tripe.

 

petersaxton's picture

Why?    1 thanks

petersaxton | | Permalink

Even though they are asking for tripe?

Interesting comments guys

jeremyiwhite | | Permalink

Interesting comments guys

Not so simple

Ian Bee | | Permalink

"A simple cash and receipts basis" we are told.

So yes it looks as though accountants won't be needed by small businesses and all they need to do is self assess tax on the cash movements in the year. But does this mean that all expenses will be allowable? And which traders will know to add back drawings?

petersaxton's picture

This wont last long    1 thanks

petersaxton | | Permalink

The tax yield will fall when small businesses use stock purchases to reduce tax.

Many small businesses are incapable of even listing their receipts and expenditure so I don't know how they will manage once they are told it is so simple that they wont need an accountant. If there are standard amounts for some expenses I can't see them excluding the actual amounts from the payments.

This seems to be ideas dreamed up by people who have no knowledge of what goes on.

Only the HMRC would ,,,,,    1 thanks

ringi | | Permalink

Only the HMRC would consider “To deal with 80% of correspondence within 15 working days” a target to aim for!

Corporate or not !    1 thanks

nigelrmorris | | Permalink

The article states :

"Companies, as well as the self-employed will be able to opt for this simplified basis."

But the http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf

document shows this -

1.210 The Government is also responding to the OTS reports on small businesses taxation.22 From April 2013 the Government will introduce a new cash basis for calculating tax for small unincorporated businesses.

What have I missed ?

 

coolmanwithbeard's picture

Companies    1 thanks

coolmanwithbeard | | Permalink

Are they removing the rerquirement for companies to present proper true and fair view accounts from the CA? or is it just for tax purposes? Will this mean I can charge small companies for 2 sets of accounts??

 

 

IR35 comments    1 thanks

Exector | | Permalink

@ John R

I took the note in the Budget provisions as an oblique reference to the recent controversey over higher end NHS appointments being paid through their own corporates, even tho they were in effect functioning as e/ees/office holders and I suspect it refers to (future) measures intended to target this rather than a wholesale change in the legislative approach to service companies. The take on this seems more based on looking to improve the functioning of the present IR35 system.

See-saw tax bills    1 thanks

Barkster | | Permalink

This is just going to disconnect the earning of the profits and the paying of the tax even more than it is at present.

As others have said, businesses could "stock up" at the year end to reduce tax for that year, or delay invoicing or getting paid to push it into the next year, but they can't keep on doing that year on year and the ultimate catch-up is going to be most unpleasant. And guess who they will blame ?

paulb's picture

I think that we all know how

paulb | | Permalink

I think that we all know how this will end. 

We receive a call from a 'new' client stating that they did there own 'accounts' and now they have an investigation and they can't understand why HMRC want the £5000 tax rebate back that they claimed last year - it was an honest mistake they thought the CIS deductions v expenditure was ok!

 

 

More penalties for missing VAT registration

janet.kendall.a... | | Permalink

I wonder how many will miss registering for VAT on time .......... or will those limits also have the option of being calculated under cash accounting?

As already mentioned, is it not also going to raise a number of tax enquiries with GP's & expenses going up and down, or will businesses with these turnovers be excluded from enquiries?

Will the purchase of stocks at the year end cause the reduced tax liability to fall under the proposed GAAR? After all it will only have been done to avoid tax in that year.

Then of course there's how to account for the transition from one method to another and presumably back again, or maybe there's to be no option once you're on the cash accounting method you stay until you have to leave.

Don't get me wrong, I'm all for simplification, but perhaps a lower limit so when the forseeable problems occur they will affect fewer businesses.

But perhaps I'm being pessimistic and all the issues raised will be sorted before the system is put in place!

Disincentive to expand?    1 thanks

Philip Espin | | Permalink

If this system comes in it will act as a major disincentive for businesses to expand beyond £150k turnover for 2 very good reasons.  Small business owners will be discouraged by getting wrapped up in red tape from expanding to the next level having never developed good practices.  Also if they have understated tax liabilities they will be reluctant to bring them to the scrutiny of a professional adviser when they get to that point so they will manage declared turnover below the threshold using means they understand much better than George does. 

Looks like a major boost to tax evasion and the black economy to me notwithstanding George apparently finds such activity "repugnant".  Could be an unintended nail in the heart for entrepreneurial growth helping the economy get back on its feet?  Correction a nail in the heart of government revenues, not the same thing!

Given that disincorporation is being simplified will the sting in the tail ultimately prove to be that this new basis will not be available to corporates?

look on the bright side !

The Black Knight | | Permalink

If you have a company / business with Stock and debtors you can get rid of these...result no tax for a year at least.

I think it is good that the chancellor should grant small business a tax holiday.

If companies are included.?

Directors loan account ? well that has not been received either does that get eliminated too ?

Can all small companies get their S.455 tax back as well.

Which set of accounts do you use for distributable reserves ?

Although I cannot see where it says companies are entitled to use this method in the budget report.

johnjenkins's picture

To me    2 thanks

johnjenkins | | Permalink

it's all just a PR exercise and a reason to keep OTS. There is nothing in the "simplification" that most of us don't do already. The problem is if that is what politicians think is simplifying things then we are in big trouble. The merger between tax and nic and getting rid of ers nic should have been number 1 on the list, but then, of course, they wouldn't have been able to reduce CT. 

simplification? wot simplification?    2 thanks

taxinfo | | Permalink

This will result in total and utter confusion across the (dash)board.

Have HMRC now moved to PROMOTING avoidance and the "back economy"?

This new proposal should be an addition to the Revenue's "Toolkits" and be called "How to keep your tax bills small with a minimalist approach to accounting".

Ye Gods.....

appears so

The Black Knight | | Permalink

taxinfo wrote:

This will result in total and utter confusion across the (dash)board.

Have HMRC now moved to PROMOTING avoidance and the "back economy"?

This new proposal should be an addition to the Revenue's "Toolkits" and be called "How to keep your tax bills small with a minimalist approach to accounting".

Ye Gods.....

 

They do say one thing and do another.

From what I have seen in the field Evaders get far better deal than the honest who are hounded on the first late payment where as those that have not filed a return for a number of years (2003 record at the moment) are left well alone.

Really all you have to do is pay the penalty and the determination (very rare) and /or only submit odd years. If you miss a few years out or use uncorrected estimated figures or complete fabrication missing real sources and creating fictitious ones this all seems to work quite well.

HMRC are really not on the side of legitimate business or the honest taxpayer.

johnjenkins's picture

I hate to say    1 thanks

johnjenkins | | Permalink

this Black Knight, but you are spot on. (I'm not saying I hate to agree with you).

stevebritgimp's picture

I don't know where to start

stevebritgimp | | Permalink

I don't know where to start with the idea of more changes of basis, especially as CIS is on a payments basis, and VAT can be on either, again depending on advantage.  I'm in favour of simplification, and some of these proposals do look like genuine simplification, but calling something simple, and it being simple, are two different things.  This will need time to digest.

Most interesting point...

Trevor Scott | | Permalink

... was the wish to integrate operations of income tax and national insurance.

mydoghasfleas's picture

And the cash to conventional transition

mydoghasfleas | | Permalink

I note the comments about cash basis and playing around with the alternative.  Then when you get to the point of being ejected from the scheme there has to be a transition.  Whatever was simplified then complicates not only because it requires a different understanding from the small business owner but also he(she) will be thrown into a bundle of transitional calculations; possibly spread over years.

Remember what it was like for barristers on the wholesale switch and new barristers who start with the cash basis and switch.  Unless the entry and exit points rise each year it will be less not more simplification.  Also many small businesses will be unaffected by this concession because they are retail so their customers pay on supply.

 

In reality

The Black Knight | | Permalink

Those that do their own accounts never read the first set of rules and won't read the new ones.

It is likely that there will be a mixture of the two methods as before.

It is quite common in vat to see outputs on an invoice basis and inputs on a cash basis or vice se versa.

 

 

lenders and income verification    1 thanks

yorkiehurst | | Permalink

as it is near impossible at the moment for small self employed to obtain finance for business or for home loans, even with supporting accounts, guarantors, hostages and the like, and the lenders still demanding AUDITED accounts to support appplications!!, how will the new rules be played out when applying for loans and overdrafts?

will lenders look at cash flow or accept traders own figures?

I can see this stunting both business survival/expansion and the housing market for some time, and given the time taken for lenders to understand and adapt to change (see AUDITED accounts above!) possibly decades!!

I would like clarification as

Eric T | | Permalink

I would like clarification as to whether limited companies are excluded from cash basis accounting.

Osborne only used the word "business" in his speech - which was totally ambiguous.

The budget brief (as quoted above) states "unincorporated businesses" - so that seems to EXCLUDE limited companies

BBC's Budget Phone In today stated that they weren't sure if limited companies were excl;uded or not.

It's all a bit of a mess.

My view is that it would be impossible to include limited companies because companies must preopare accounts iin accordance with company law - which should preclude simple cash accounting.

SPOT ON

markgosling | | Permalink

IAN BEE

You are spot on. I have just had a small sole trader come to me who completed his tax return himself and did not understand why he had no tax to pay. The main reason was that he had included drawings as wages. He also had claimed fuel costs as well as milage allowance, and several other mistakes.

I have just amended his tax return and his tax bill has gone from Nil to Almost £5000 despite me claiming things he had missed.

Just proves what a mess they can get into by not employing a tax adviser.

Simplify IR35 for those caught by the "Granny Tax" outrage!

dstickl | | Permalink

John Stokdyk wrote:

I think the philosophy around these reforms is to steer small traders away from the incorporation route (though not professional practices, perhaps). But I shared your concern when I saw a bullet point about "Tax mitigation and IR35 ".

Still looking for details, but I think a lot of the things listed on HMRC's site hark back to previous announcements - in this case, an undertaking to review the operation of IR35 

Hi John! Today I heard David Gauke MP (Exchequer Secretary to the Treasury) say on BBC R4 “World at One” that “those over 65 will not pay National Insurance contributions”, as part of his defence of the tax in real terms on grandparent(s).  

 But that's wrong, isn’t it, for those workers who have to work because their pensions/savings have been damaged due to the banking crisis, and who are over 65 and who are caught by IR35, because HMRC’s Tax Manual ESM3169 states "apportion [the figure at Step Seven] between the deemed payment and the employer’s Class 1 NICs due on that payment".

 

SOLUTION: May I suggest (in order to calm down the outrage of a “Granny Tax” by Chancellor Rt Hon George Osborne MP) that in future:

Employer National Insurance Class One contributions should be waived by HMRC - as part of the "admin" changes to IR35 announced by the Chancellor -  for any worker aged over 65 that might be caught by IR35, with effect from 6th April 2012?

abelljms's picture

i shouldn't read this stuff

abelljms | | Permalink

i shouldn't read this stuff as it always shoves up my blood pressure.

"HMRC plans to roll out single registration services for companies so that registering a company at Companies House will also include registration for corporation tax"....

 

it already is like that so what's the ACTUAL change here? you get a letter from hmrc within seconds of registering a new company already with your CT ref....grrr.

 

 

 

abelljms's picture

cash accounting

abelljms | | Permalink

i went to the official consultation on this and the verdict was 90% that this is a waste of time.

think it through you get near your y/e, and have a £50k profit looming. You send £10k on the last day of the year to a supplier for the next months purchases - bingo £40k profit.

HMRCy won't have that, so to stop it there will reams of teeeedious anti-avoidance regs thereby destroying the alleged simplification benefit etc......zzzzz

 

 

 

 

RebeccaBenneyworth's picture

limited companies    1 thanks

RebeccaBenneyworth | | Permalink

Sorry the article isn't completely clear. Companies can use the flat rate expenses dealt with in the article as a simplification but I double checked with HMRC & they certainly will not be able to go for cash accounting. I thought I had written it clearly but I can see that I left room for confusion. Sorry folks, I'll edit when I get a chance to put it more clearly.

petersaxton's picture

Confusion

petersaxton | | Permalink

What usually happens with a new small business is that you explain what they have to do and they don't do anything until the accountant is chasing them and they ignore what they have been told by their accountant and make it up as they go along. They will have more opportunity to get it wrong with this "simplification".

I send my clients templates and explain what they have to do countless times and I still get nonsense back regularly.

One client listed sales invoices on a bank payments spreadsheet despite clear headings. I wonder what they thought when they saw the sales invoices spreadsheet. I wouldn't mind if they list all the information I need but they ignore the headings that don't make sense and don't provide the information in the spreadsheets they should have used.

I have had a client today and I explained that his new company accounts data didn't make sense. His bank receipts less bank payments didn't agree to his bank balance. I told him that he had previously said he was in financial difficulties so I suggested that he should look for the differences. He said that we should call the difference sub contractor expenses! I explained that we shouldn't make up the figures but he denied that was what he was doing. He wanted me to find the difference for him and said it should only take me an hour. Can't he spend two hours doing it instead? I am going to put together a document that explains what information I need and how it should be collected. I will also explain in clear terms what happens in a business and how simple the accounts record keeping is. I should have done this previously. My next challenge will be to get my clients to use the document!

petersaxton's picture

"Simplification"

petersaxton | | Permalink

Why does government ignore the obvious sensible simplifications and instead do things that will complicate things even more?

Not Simple!

North East Acco... | | Permalink

Most small traders who prepare their own accounts and tax returns have been doing them on a cash basis anyway.

Now two systems, transitional rules and probalbly higher accountancy costs as a result.

This ill thought out proposal is purely so the government can say it's making it simpler for small business. What a joke!

 

The on-line CT registration is not integrated at present

ringi | | Permalink

You may get the letter with your CT ref when you create a company however you still need to sent back a form and then complete a few steps to register on line for CT.   I think it is this registration for on-line CT returns they are talking about.

Then there is the PAYE registration that is yet another set of web forms and letters to setup on-line access, then pay be VAT as well….

(Can there be a single place to change a company’s address as well, I had to update Companies House and 3 separate bits of the HMRC, so 4 web forms to complete and not even a page to linked to all of them!)

 

abelljms wrote:

i shouldn't read this stuff as it always shoves up my blood pressure.

"HMRC plans to roll out single registration services for companies so that registering a company at Companies House will also include registration for corporation tax"....

 

it already is like that so what's the ACTUAL change here? you get a letter from hmrc within seconds of registering a new company already with your CT ref....grrr.

Not yet, but if the works then LTD may be included in “round 2”

ringi | | Permalink

I expect in a few years time this may all be extended to Companies if it works well for sole traders. 

Hopefully not having to account for capital spending separately when the capital spending is very low will be allowed for Companies – any info on this yet?

Likewise it would be great if Companies did not have to account for stock (or work in progress)  in detail when it was below (something like) 5% of turnover.

 

RebeccaBenneyworth wrote:
Sorry the article isn't completely clear. Companies can use the flat rate expenses dealt with in the article as a simplification but I double checked with HMRC & they certainly will not be able to go for cash accounting. I thought I had written it clearly but I can see that I left room for confusion. Sorry folks, I'll edit when I get a chance to put it more clearly.

Sympathetic but sceptical...

John Snowden | | Permalink

I am certainly in favour of simplification, if it is real and coherent. However, a couple of issues spring to mind:

1. Transitional matters will prove very complex, and

2. There will be serious competition issues (even more than now) 

 - as between companies and unincorporated businesses on the one hand and

 - as between businesses growing from below £77k turnover but approaching £150k and those which were already above £77k in the first place and so not eligible to cash account.

(Why should there be such a big gap, I wonder? I should have thought £85-90k would be a more sensible top limit.) 

On a more positive note, if this does come in, I reckon there are things we accountants could do to help and keep helping those clients who might otherwise depart in terms of advice, assistance and tools to help them do cash accounting right. Those who are unrepresented now, well, no change there so no threat.

Tom 7000's picture

Moving goal posts

Tom 7000 | | Permalink

In my opinion those without accountants do their accounts on a cash basis anyway ( try asking them what a debtor is!)  So All they are doing is changing the rules to fit with what really happens, to save tax inspectors investigating. well...if there are any left after the austerity measures

Complete Madness

Mallock | | Permalink

I think the Government's proposal shows how far removed from reality those in power (or advising them) are.

I met a prospective client yesterday. This individual prepared his own tax return by summarising his bank statements at the end of the year. He only had about half of his expense receipts and the others were, in his words, spread about the place, in his van or lost.

He didn't have a full record of all his jobs or sales and only put cash into the bank when the account needed it meaning that a totally unknown amount of cash jobs never hit his sales figures.

When I pointed out the error of his ways he told me that everyone he knows does the same and if that was my attitude he would be taking his business elsewhere.

I think before there is any "simplification" of the rules there should be a bit more education.

 

If a tree falls in the forest and no-one is around to hear it...    4 thanks

Barkster | | Permalink

It's all very well us ranting away to ourselves here on AnyAnswers, but what do we need to do to get all our opinions heard and felt by the OTS and HMRC to stop them implementing this garbage and wasting all our time ?

 

Simplification    1 thanks

SWJWBA | | Permalink

Remember when it was called 'Simplified Self-Assessment' and then after a few years they dropped the word 'Simplified'!

This really is a joke. Until they all spend time at grass roots level they will never understand!

There is talk of putting financial studies on the school curriculum to enable the young to understand such matters and so set them up correctly for the future - then they say well forget about proper accounting just think about cash movements.

Why not just say anyone in business has to have an accountant, qualified or otherwise, as part of the cost of being in business. It really does not cost that much (and if it does then will all affected parties please contact me directly for some real cash savings in accountancy fees and good advice as well !), it introduces financial discipline, promotes understanding and provides reliable financial information for a variety of uses.

What will happen when a client using cash accounting (manipulated by accelerated stock purchases to save tax) wants a mortgage and is refused because they haven't got suitable financial information.What about tax credit claims that can now be fudged by a cash basis. Why did they remove cash basis of accounts years ago for professional firms only to now say well everyone can do it.

These proposals are ill thought out, have not been discussed with those at grass roots level, only by members of committees (including qualified accountants) who have not seen a brown paper bag job since they were in shorts, have no appreciation for (or even a need to understand) the real world and seem intent in making such suggestions in an attempt to promote simplification just because it is politically the right thing to do.

As an accountant my job is not only to prepare accounts and assist with tax compliance but to impart the breadth of knowledge and experience gained through studies and practice so that clients do not find out about their mistakes the hard way and prevent their business from growing.

Rant over!

Steve Jones

Halesowen

West Midlands

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