Small business taxation - The indefinable in pursuit of the unachievable? By Nichola Ross Martin

Nichola

I'd like to post a reply to you here. But the space limit here is so small now that debate is not possible.

Suffice it to say that I think you are actually asking for enormous complexity, matched by additional profit, risk and hassle for accountants. I explain why here:

http://www.taxresearch.org.uk/Blog/2006/11/23/lets-get-real-about-cash-accounting-it-would-be-a-nightmare/

Richard Murphy

OK, so being a lawyer at Freshfields is about as relevant to small business taxation as being a partner at Deloittes Hong Kong is when it comes to setting the IFRS for small and medium sized entities. I agree. But the IASB has appointed a partner at Deloittes HK to do the IFRS and maybe we should be asking why it is that there really is no small practice representation on the current review of small business tax.

I hate to say it, but it's because most small practitioners have a view on the subject, but don't actually come up with workable suggestions. Or even arguments for change.

Take cash accounting for starters. People seem keen on it. But who has actually sat down and worked out what such a set of accounts would look like? What standards would apply to their production? Who is sure they will supply meaningful information? Has anyone any real evidence that clients understand them? What are the performance standards that you apply to them? Is it possible to tell a client they had a good year because they have a low tax bill but failed to recover their debt? I've seen none of these issues addressed, and yet cash accounting is being proposed.

I try to address real issues. So do tax academics. You may not like the results, but who is doing the alternative thinking?

Richard Murphy
http://www.taxresearch.org.uk/blog/.

The problem here is, as Nichola states , is that Politicians and Academics are making decisions based on the numbers. This is a fundamental error because the wider picture must be taken into account when making such far-reaching policy.

If the situation is such that the majority of these Self Employed and Owner / Manager Corporations are scraping a living from the current regime, then an increased burden of Taxation and / or Red Tape could see this sector disappear.

I suspect there are 100s of thousands, possibly, millions who are in this sector who would otherwise be claiming Unemployment Benefit.
The danger is that if you squeeze too hard they'll disappear. The result to the Economy would be disastrous.

The Government is driven by Tax Greed as we all know. It will attempt to tax the life out of everything bar PAYE. As we know PAYE is vote sensitive so is seldom touched.

This is not the way to run a Government's fiscal budget with everything hidden away in the small print as has been the case in recent years.
The ultimate result of all this is akin to death by a thousand cuts with the Economy suffering.

What is needed is an honest approach to taxation where the cost to end user is simple and up-front. And, again as Nichola said, the huge risk and long hours of the one-man Self Employed and Owner / Manager Corporation must be acknowledged by a lower rate, at least up to the starting point for Higher Rate Tax.

Lets not forget, it's this sector that bare the biggest burden, proportionately, of Red Tape and compliance costs. And, in most cases, earn the least per hour.

Yes, a very interesting article. You are quite right in my book, drop the idea that "cash accounting" has any reference to accounting principles and we lose the element of complexity that many think attaches to such a change. We could then call it "attractive simplicity" for the record.

I had trouble with the statistics mentioned in the lecture, but it would seem that simplified accounting could benefit at least a third of small businesses.

Nichola Ross Martin
Editor, AccountingWEB

This week's Taxation has a defence of cash accounting, though I've suggested it is misnamed: http://www.taxation.co.uk/Articles/2006/11/23/51297/What's+in+a+name.htm

Mike Truman

I note that Nichola says:

"We agreed that it seems quite dangerous to allow academics to decide tax policy as they lack hands on experience."

That's not true of Judith Freedman. She was a lawyer at Freshfields before becoming an academic.

Second, I'm afraid that this article proves whey academics must be involved. They know that taxes on transactions (VAT) look very different from taxes on income (income tax or corporation tax) and that because cash accounting might be appropriate in one case there is no logical argument to suggest it might be in the other.

To put it another way, academics think about these things.

I declare three interests:

1) I hold fellowships at the Universities of Sussex and Nottingham
2) I know Judith
3) I agree with her. Cash accounting makes no sense for small business. See http://www.taxresearch.org.uk/Blog/2006/11/06/cash-accounting-a-non-starter/

Richard Murphy
http://www.taxresearch.org.uk/blog/.

BUT I can see no sense or logic and I therefore expect no sensible answers from a study of small business taxation that does not involve a large number of practitioners who have a few decades of experience in the field.

Academics may have their place, but they must be open minded. There is no place for the big accountancy firms. Small business cannot afford their fees so they don't know them.

When is somebody going to ask us small practitoners?

That's not true of Judith Freedman. She was a lawyer at Freshfields before becoming an academic

And therefore lacks any real experience of running a proper business as stated.

NeilW

Neil Wilson beat me to it.

I think it is stretching a point a little too far for Richard Murphy to claim that a lawyer who used to work for a Magic Circle law firm has any practical experience of real relevance to small business taxation.

I'm afraid I disagree with this notion that the self-employed should enjoy a lower tax rate than the employed. I see no justification for it.

The reward for the effort and risk of the self-employed is the ability to sell their effort at a greater return than the employed. If they don't achieve that, then they can pack it in and get a proper job.

There is no reason to encourage people into self-employment if the reward differential doesn't justify it. The tax rate should be neutral on the matter to prevent tax driven market distortions.

NeilW

Richard, the idea we suggested was that micro (tiny) businesses cash account.

No accounting standards and no performance indicators are needed (or wanted).
As these are very small businesses all they need to know is cash in, cash out. As to bad debts, they generally have very few, and as these businesses are only interested in cash, they are pretty good at collecting them.

Ever heard of a domestic plumber/handy-man/gardener/cleaner/cabbie/driving instructor/dog walker/childminder...etc with bad debts? Likewise with creditors, these businesses do not have too many, and they know what they are doing because they are all mindful of their cashflow.

For mortgage purposes, what the lender wants is a good credit rating and good cashflow forcast. Quite easy to supply a lender with a list of forthcoming work, historical accounts are pretty useless for small cash based businesses.

Protecting the revenue? Well the great thing about these types of micro business is that they generally spend all they earn, and so it is highly unlikely that they would surpress their receipts in a material way to pay less tax.

What will these accounts look like? No reason why you should not analyse payments into normal expense headings to get to net trading income. In most cases the accounts will look pretty similar, just no debtors, creditors or depreciation. Really not that tricky, but then again, that is the whole idea!

Nichola Ross Martin
Editor, AccountingWEB

is used by most Accountants on micro and small business.
Because of the costs involved balance sheets are hardly ever produced.
Lets face it if one were to switch from historic to cash accounting it would only affect the year of the switch, the same as with VAT. Is it really worth apportioning a £100 telephone bill into a PIA and creditor year after year?
I totally disagree with the comment that all micro business have no intention of expanding. Where do small and larger business come from then - scotch mist!!!
However I do agree that every entity should be taxed at the same rate, but FYA should be 100%.
Not much uptake on VAT flat rate. Lets take the construction industry; Customs have not taken into consideration new work - which is zero rated - so why should contractors or subbies pay more than they need to.
Richard commented on small practitioners having a view but no alternative. Well Richard get all the back issues of Accounting webb and Tax zone and READ the comments PROPERLY, I'm sure you will find our MANY BRILLIANT and SIMPLE ideas have fallen upon stony ground.

I am enthusiastic about simplifying the small business tax regime.

At first I thought that cash accounting was the way forward but I've talked to Richard Murphy and I've read Mike Truman's article, and I can see now that cash accounting would bring its own raft of complications with it. HM Revenue have tried it once (before I joined the profession) and may well be unwilling to try again.

If that horse won't run, let's look for one that might. Because if we as a profession are pulling in different directions, we won't achieve anything.

I like the sound of Richard's idea (see his last posting). Nichola and others, what do you think of it please?

M

You cannot just simplify the small business tax because of all the interactive links.
The reason why our WHOLE tax system is unworkable is because it has been tinkered and tampered with so much. Surely Richard, even you, must agree with that.
So we need a different form of collecting Revenue to pay for Government / Coucil spending. One that is fair to all and that the electorate can relate to when making their choice.
Until someone in Government with a bit of guts says enough is enough it will never happen and we will go on bickering while they go on tampering.
So Richard concentrate on setting up a think-tank to come up with something to completely replace our outdated system. NOT a review, a total re-think.

I explore a real alternative for small business tax reporting at http://www.taxresearch.org.uk/Blog/2006/11/27/a-genuine-tax-simplification-for-micro-businesses/

This avoids the complications cash accoutning will cause. It stops some of the game playing accountants would otherwsie do. And it offeres a win:win for the Treasuy and taxpayers.

Who will lose? Well accountants, in all probability. But that's always going to be the reality of real simplification in the micro-bsuiness sector.