Should there be a turnover tax for small business? By Simon Sweetman

Last year when HMRC were looking seriously at simplification, inlcuding the corporation tax proposals to move to cash accounting I raised this with the team.

They had looked in some detail at flat rate tax but were not convinced that it would work. To me, if left optional only those who save tax would adopt it, which would inevitably lead to loss of tax, and if made mandatory would be impossible to mimic the structure of small businesses.

Here's one example - business A has one employee and is a service business. The employee is paid market rate. Business B depends on the help of the spouse of the owner for the same amount of help, in return for a small salary or maybe a share of the profits. The cost base is very different and a flat rate tax would have to cope with both. Maybe business C does the same but the owner works for 17 hours a day to save money.

Two points:

1. I'll lay more money on getting an invitation to the Pope's wedding than seeing our meddler-in-chief implement this! Maybe after a change of government next year, but I can't see HMRC going for this at all either. They are under severe pressure to maximise the tax take to fund the deficit. Limiting their opportunity to micro-inspect won't be welcomed by them.

2. This really does strike at the heart of the value that Accountants add - surely everyone's in business to make money... why would anyone with that objective be counselled to end the primary means of measuring this.

Cash management by Balance Enquiry at the ATM is never advisable - to also measure profitability in the same way is surely retrograde and almost anti-entrepreneurial!

IR35, CIS and MSC legislation are all turnover taxes in all but name...

The french government has just introduced a similar scheme from Jan 09 - called the auto-entrepreneur regime, and has proved very popular so far for small businesses.

.....but it would be even easier for small business owners to fiddle...

you may wish to look at the Spanish treatment of small businesses and rentals etc

It would need to be like the VAT flat rate scheme where different types of businesses pay different rates. In fact they might just increase the VAT flat rates a bit and forget income tax altogether, assuming there is no other source of income. You would have to be barred from the scheme if you had other income sources. If they still need to do a Self Assessment Return anyway to mop up other forms of income it is pointless because that is where it gets complicated for laymen, not in the figuring out of their profit.

And do you allow businesses to decide each year whether to use the scheme, or are they stuck with it, once they have opted? Either way is problematical. If they can choose each year they will obviously prepare accounts and find out which is the best way to go each year, so the taxman loses out. If they can't choose each year, no-one (especially now) will risk having to pay tax on losses in the future, or on a turnover resulting in profits below the personal allowance, so no-one will subscribe.

I don't think businesses should be encouraged to abandon record keeping completely. If they do they will not know whether they are making a profit or not until the bank account runs dry and the bailiff turns up.

I think with a bit of common sense, and the will, the tax system could be simplified without getting rid of the fundamental principal of paying tax on your profit or gain.

She would be out of a job !