NZ experience supports UK simplification plans

John Haylock, the practice performance manager for BankLink, draws parallels between proposals to simplify reporting requirements and tax calculations for small businesses in Europe and the UK with similar reforms in New Zealand.

Reporting and tax simplification are also in the news in New Zealand. Changes to the Companies Act reporting framework for New Zealand companies were announced in September. From 2013 it is proposed that most small and medium companies will no longer need to prepare annual financial reports.

While that will simplify reporting for many companies there will still be requirements to prepare financial reports for tax purposes – for companies, partnerships and sole traders.

The need for simplification has been growing. In 2009 New Zealand’s Inland Revenue Department surveyed tax compliance costs for small and medium enterprises (SMEs). It reported that the average compliance costs for all SMEs was just over NZ$5,500 per annum (around £2,700). Around 70% of this was internal costs, with the rest for external tax advice.

The IRD report also showed the relationship between turnover and tax compliance costs:

This graph shows how the tax compliance burden falls so unfairly on New Zealand’s smallest businesses and why tax simplification is so desperately required for those small entities. I have not seen a similar calculation for the UK but suspect the relationship would be similar and the need for reform just as strong.

Recognising this problem, the New Zealand Institute of Chartered Accountants and Tax Management New Zealand have jointly developed a proposal to simplify taxation for small businesses. It’s a proposal of direct relevance to the UK.

The proposal has two main components – both utilise cash-based accounting. The two components would be optional and businesses could stick with the current accrual-based regime if they wished.

1. Businesses turning over less than NZ$60,000, not registered for the Goods and Services Tax (GST) and with no employees could pay a turnover tax (calculated as a ratio of turnover) instead of traditional income tax. This turnover tax could be paid either when income was received or on the 20^th of the following month.The threshold of $60,000 was chosen as this is also the registration threshold for GST.

2. Businesses turning over less than NZ$600,000 could calculate taxable profit on a cash basis. This would use the same data as cash-basis GST returns and be paid every two months in association with the existing GST payment cycle. There would be no year-end square up and no “balance date”.

New Zealand is well set up for such cash-based methods as the BankLink Service is widely used by accountants. The majority of small businesses already file their GST returns on a cash or payments basis.

This proposal was first prepared in 2009. At the time it attracted considerable discussion.  I understand a slightly revised proposal is being prepared for presentation to the New Zealand government and other key stakeholders.

The thrust of this proposal is similar to that recently proposed by the UK's Office of Tax Simplification. There is one key difference – the way in which the calculation and payment of income tax is tied with the goods and service tax. I suggest that linking the calculations and payment of VAT and income tax for micro-businesses should likewise be seriously considered in the UK.

John Haylock, Practice Performance Manager at BankLink
BankLink provides the software and data that enables accountants to efficiently prepare accounting information from an electronic copy of their clients’ bank statements.