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HMRC consults on simplified tax accounts

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30th Mar 2012
Partner Rebecca Benneyworth Training Consultants
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HMRC has published a consultation document on proposals for introducing a voluntary simplified cash basis for income tax and simplified arrangements for certain expenses, as announced in the Budget.

HMRC has issued the consultation document on small business taxation. The consultation opened on 27 March and will conclude on 22 June 2012, after which legislation will be drawn up to include in the 2013 Finance Bill. It is quite likely that an early draft of that legislation will be released before the end of 2012. HMRC has also said that they will be meeting with interested parties during the consultation period.

Who can use the new basis?

The new rules fall into two areas, voluntary cash accounting and simplified expenses. Precise details of how the rules work are dealt with below. The rules as to who will be permitted to use each are proposed as follows :

  • Self employed individuals and partnerships of individuals (but not LLP’s) will be permitted to use the voluntary cash basis. If they decide that they wish to do this they must have turnover of less than £77,000 (on a cash basis) in a year to start using it – this is deliberately aligned with the VAT threshold, and is therefore likely to rise over time. They can then remain within the scheme until their receipts reach £150,000 in a year. If they choose to use the voluntary cash basis, they must also use the simplified expenses rules. In technical terms, it is those businesses within the scope of Part 2 of ITTOIA 2005, comprising businesses carrying on a trade, profession or vocation.
  • Property businesses will not be permitted to use the cash basis. It is proposed to develop similar rules for these businesses in the future.
  • Any business that is registered for VAT but not using the VAT cash accounting scheme will not be permitted to use the cash basis of accounting.
  • Businesses such as farmers or creative artists that have a current averaging claim will not be able to use the cash basis, nor will farmers using the herd basis
  • Financial trading businesses and Lloyd’s members carrying on underwriting business will also be excluded from using the cash basis
  • LLPs will not be permitted to use the cash basis.
  • Companies will not be permitted to use either the cash or simplified expenses rules, and must therefore continue to keep full detailed records of all income and expenditure and prepare accounts under GAAP for tax purposes.
  • Any business other than companies (including LLPs) will be permitted to use the simplified expenses rules.

Where a person (or a partner) has more than one unincorporated business potentially within these rules, then the cash basis is only available if all of them together are below the threshold. Where the normal accounting rules are adopted for any of the businesses, then all of the businesses must move over to normal accruals accounting, except where the other business is a partnership over which the individual has no control. The example given is that of an individual who is a partner in a large professional partnership who runs a small unincorporated business in a different field. The cash basis would be available to the separate business.

The cash basis

Eligible businesses will merely record the business receipts in the period and the amounts paid in respect of allowable business expenses. As they are required to also use the simplified expenses rule, they must also record how many business miles they travel a year by car or by motorcycle, and estimate how many hours they spend working at home on their business. The cash basis must be operated on a fiscal year basis – that is from 6 April to 5 April. The taxable profit is the amount of receipts, less the allowable business payments, less the simplified expenses calculated.

Allowable expenses

The following are listed as allowable expenses:

  • Expenses incurred for the purpose of the business
  • Some purchased assets such as plant and machinery and 
  • Interest on purchases provided the purchase is allowable. This includes HP interest, trade credit charges and interest on a credit card provided it is used for business purchases.

Disallowed expenses

The following are listed as disallowed:

  • Other purchased assets such as investments in land, property and shares
  • Costs allowed by the simplified expenses rules (see below)
  • Entertaining and expenses for private purposes
  • Non-cash costs such as amortisation
  • Interest on cash borrowings, such as a bank loan
  • The withdrawal of cash for personal use, and
  • Payment of income tax or capital gains tax, and national insurance contributions.

Transition to and from the cash basis

HMRC will provide guidance to businesses on the transition to and from the cash basis. The necessary adjustments are described in the document in fairly simple terms. It will be clear to members that this will involve the following :

(a) Moving from accrual basis to cash basis

  • Add opening stock and prepayments to deemed business expenditure in the first period;
  • Deduct opening debtors (including VAT) and work in progress from the business receipts in the period
  • Deduct opening creditors (including VAT) and accruals from business expenditure in the period,
  • Deal with the tax written down value of fixed assets other than cars and motorcycles as expenditure in the first period on the cash basis, and
  • Deal with any businesses which have previously used a different year end than 5 April, including the overlap or transitional overlap profits, by making the final period on the old basis end on 5 April.

(b) Moving from the cash basis to the accruals basis

It is anticipated that this will require only closing adjustments in the first period on an accruals basis, to introduce creditors, debtors, stock and work in progress. Clearly, capital allowances in the first period on a conventional basis will have been calculated as relevant (on purchases in that period), so a tax written down value will automatically arise. Vehicles other than cars and vans which have been claimed for on a per mile rate must stay on that basis until replaced.

Complications

The following elements of the proposals represent complexity for businesses:

  • Where there is a significant reduction in the business use of an asset which has been relieved, then a private use adjustment should be made. Similarly, the purchase of an asset for part private use should be subject to a restrict ion. However, given that cars and motorcycles are dealt with through the simplified expenses rules, this should not be a common occurrence.
  • Receipts in the form of “money’s worth” should be treated as income. It is unlikely that the unrepresented will cope with this concept.
  • An adjustment will be necessary for transactions entered into not on an arm’s length basis. The example used is goods taken for own use, but similar adjustments may be necessary for expenses.
  • There is a key exclusion for the cost of borrowing, including arrangement fees and interest. This is on the basis that the deductions have been given on a cash basis so it would be inappropriate to allow for the interest.

Treatment of VAT

It is proposed that the cash basis will operate on VAT inclusive figures, so that any VAT paid to HMRC is treated as an expense, and any VAT repaid to the business is treated as income. This would obviously combine well with the flat rate accounting scheme for VAT, but this is not a requirement of operating the cash basis for direct tax. However, it is essential that the business uses the cash basis for VAT accounting as this is a condition of the scheme.

“Excess expenditure”

Where a business shows a negative result for a period, this is carried forward to set against future income. The concept of loss does not arise here as a profitable business can still experience negative cash flow. If a business wishes to claim loss relief it will have to move to a GAAP basis and calculate actual profits and losses.

Simplified expenses

There are three aspects of the simplified expenses proposals:

  • A standard mileage rate for business use of cars or motorcycles;
  • Flat rate expenses for business use of home
  • Flat rate adjustment for personal use of business premises

The simplified expenses rules would be mandatory for businesses using the cash basis – but optional for some others – see above. The standard mileage rates will be mandatory for cars and motorcycles, but could also be used for other vehicles such as vans; the same treatment must be adopted for all vehicles of a particular type. This will not be possible if the vehicle has already been claimed for under the capital allowances regime. On exit from the cash basis, businesses would be required to continue using the mileage rate for all motor vehicles.

The flat rate expenses for business use of home would provide a deduction either as a single flat rate or on a three tier basis, with a similar adjustment for personal use of business premises, which will be a three tier banded flat rate adjustment to Actual costs to reflect private use of the premises.

Other simplifications

  • Unless there is a material element of private use, it is proposed that telephone and internet costs should be allowed in full.
  • HMRC will review and update current guidance on subsistence costs for small businesses travelling away from base.
  • Stationery and related items – instead of apportioning costs, HMRC proposes estimates of business costs such as a per letter basis.

Your views

Some of our members will be small business owners who may be able to use these simplified rules for their own businesses. How do you feel about that? Would you support clients who wish to move to this simpler basis? As accountants, can you see any flaws in the technical nature of HMRC’s proposals? Do you think that explanations can support the unrepresented to get this right?

We’ll be starting a discussion group this week for those who would like to contribute to the consultation. The questions from the consultation document will be posed over the coming weeks, and we hope to prepare a formal response to HMRC in early June.The proposals put forward are far-reaching for the profession and your input as professionals will be valuable.

Replies (54)

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By johnjenkins
28th Mar 2012 20:16

Does anybody

feel the need to "consult" when it's going to become law anyway. What a total waste of tax payers money. More shouts of "tax avoidance" and "level playing fields".

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By Trevor Scott
29th Mar 2012 08:46

Flesh on the bones?

Standard mileage rates at a time when fuel prices are see-sawing?

Given the standard of tax inspectors…apparently … the senior inspectors of tomorrow (or is that today?)….

http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9172...

" ...tax courses up to the equivalent of A-level or a Higher National Certificate, accredited by the Association of Accounting Technicians. "

Nicole Newbury, head of the HMRC tax academy, told The Telegraph that external accreditation of its tax degree would help give staff “the confidence to take on the best of the private sector tax experts in tax disputes”.  

 

The only questions are how much money and resources will be wasted and how many years will they try to plough on with these “anti-fundamental accounting concept” attempts to confuse one set of people and for the other help fraudsters evade their true higher taxes.

It started off as a joke and now reads as just another farce.

 

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By justsotax
29th Mar 2012 11:02

@Trevor....they simply want post-grads with no

real world experience to be the inspectors of tomorrow - trained in the revenue way with the revenue mentaility.  The reason I suspect they are unable to compete with the tax professionals in private practice is that very fact - they have no 'real' world experience in private practice (or in businesses in general) and therefore cannot see the wood for the trees when it comes to making pragmatic decisions on cases (or indeed knowing when to push harder).

 

 

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By johnjenkins
29th Mar 2012 11:19

Therein

lies another story. They don't want them to think or have experience that way they can't question.

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
29th Mar 2012 11:44

I do think we have something to contribute here

I'm just finishing off the detailed document for us to comment on and submit. I'll be posting it shortly, but there are some quite important questions in it that we can offer views on...

 

Rebecca

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Replying to Counting numbers:
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By B.R.
02nd Apr 2012 11:56

Simplified Tax Records

Abandoning GAAP and accruals basis and the introduction of cash basis accounting makes me small a rat! Wait and see how long it is until our friendly bank offers a "free" analysis to traders to allow them to complete their own Returns. The introduction of the European Micro Company will extend the concept further - at the end of the day "you can't compete with the multi-nationals"!

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By johnjenkins
29th Mar 2012 12:04

You're taking

a chance Rebecca. I honestly can't see any Accountant opting for this version of Accounting. So it'll only be for those few that do not have professional help.

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By ireallyshouldknowthisbut
29th Mar 2012 13:08

I actually think the cash accounting is a good plan for unincorporated bodies as are flat allowances it makes it really easy to understand for everyone.

Lets face it, many businesses who do not have an accountant ALREADY account and submit return on a cash basis, not least they they have never even heard of the accruals method.  Surely everyone on here will have taken on clients who have DIYed and then have had to move them to an accruals basis?

The key is to make sure that its done in a sensible manner. The most obvious issue to me is that with a turnover based method you are lumping together what is probably a big contractor with a small shop. They may need to think about that more. Also it may make sense for SOME things like stock to still have adjustments to avoid manipulation, but just let the little things go. I am not quite sure how you would do that and keep it simple but thats surely the sort of area that accountants should actively be invovled in debating.

By refusing to take part in the debate I think accountants just look like "bad losers" and make it easier for HMRC to dismiss our comments on other issues that really do matter.

 

 

 

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By johnjenkins
29th Mar 2012 15:53

I've got news for you

ireallshouldkn, HMRC dismiss our comments anyway if it doesn't fit in with their regime. As Far as cas accounting is concerned it's a non starter, purely because cash flow cannot be regarded as Icome and expenditure for any other purpose as it doesn't mean anything.

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By thomas34
29th Mar 2012 17:44

Simplification?

These proposed new rules seem to be aimed at the unrepresented taxpayer although in practice tax agents will need to spend a lot of (chargeable?) time assessing the pros and cons of every individual case. It is likely to be an annual exercise unless HMG impose some sort of restriction on hopping from one system to the other.

Having worked with an accruals basis of accounting since the 1960s I'm quite happy to look at an alternative but will never be convinced that this is simplification.

There's a lot in the document and I've probably missed something but a few paragraphs stand out.

(1) The taxpayer's year end will be 5 April so presumably any overlap relief brought forward will be crystallised? This could be expensive for those with a 30 April year end. I've managed to get my last two clients with this year end changed to 31 March but it did cost them because of 20 years worth of inflation since they chose that year end. Since most businesses prepare books on a calendar month basis, this seems a retrograde step - I don't buy the excuse that non-business income uses this date.

(2) It appears that interest payments (hire purchase or bank) won't be deductible unless I've misread the document - a disincentive.

(3) It seems that any unrelieved pool expenditure will be allowed against year one's profits - a useful deduction but does seem to preclude restricted claims where there may be a wastage of the personal allowance.

(4) Sideways loss relief won't be allowed which may be a disincentive particularly for new businesses.

(5) Bribes won't be allowable as a deduction (para. 3.39) - I suppose there must be someone to which this relates but I never seem to meet these types of clients.

 

 

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By pauljohnston
02nd Apr 2012 11:46

I think that we should take part in the consultation

Not to do so would be silly.

I dont pretend to have read all the rules but as I see it if we as accountants are not used (to allegedly save money) we will have to pick up the pieces when a non-representated tax payer has an enquiry, makes a loss on which he is hopping to get back some tax already paid.  When he goes over the threshold for cash basis either for VAt or under the new rules mentioned in this post.  I guess this may mean more work for us..

 

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Should Be Working ... not playing with the car
By should_be_working
02nd Apr 2012 11:47

Am I missing something?

"There is a key exclusion for the cost of borrowing, including arrangement fees and interest. This is on the basis that the deductions have been given on a cash basis so it would be inappropriate to allow for the interest."

How can I put this ... I don't get it.

Does it mean the business would have already included the loan drawdown as a taxable receipt and the whole (capital & interest) repayments as a deduction? Surely not. Am I being thick?

 

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By johnjenkins
02nd Apr 2012 11:57

Hire purchase interest

for an allowable expense is allowable. Bank loan interest isn't. I presume bank charges, interest on overdrafts and Insurance on overdrafts are also not allowable. What about credit card charges and machines?

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By AndyC555
02nd Apr 2012 11:59

'consultation'

I recall the 'consultation' on the snappily titled "false self-employment in the construction industry" issue.  After the consultation, HMRC basically said "thanks for your input but we're going to go ahead exactly as we planned anyway".

 

As for sending HMRC staff on a training course, I thought they did that anyway?  I went through the HMIT 'fast-track' scheme back in the late 80s/ early 90s and it sounds similar, 1 day a week and spread over around 3 or so years. 

 

Bit worrying that they have to be sent on a course to understand tax returns.....

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By Bill A
02nd Apr 2012 12:14

Makes sense to me

It's the devils own job getting some clients to understand the need for debtors and creditors and obtaining the information from them. Although they are in the minority I believe most of them will continue to want professional help for the reassurance it provides.

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By johnjenkins
02nd Apr 2012 12:23

Why get

clients to understand anything. Could we understand computer systems, house building etc. etc.

They pay us to do the job we are trained to do. That is why there is so much trust between us and client whatever size.

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By Eric T
02nd Apr 2012 12:25

The advent of cash accounting should not involve the abolition of the concept of capital/revenue.

Interest on any sort of business related finance I would assume would always be allowable, whilst repayments of capital sums would not.

Problems could arise regarding capital costs and when and what Capital Allowances can be claimed.,What type of Capital Allowances would a business obtain if it bought an item on HP. What constitutes a "cash" payment when an asset is purchased over a period longer than one year?

I would be interested to see what constitutes "cash". I presume it will follow the definitions of "cash" as set out in the VAT Cash Accounting rules.

 

When is "cash" not really cash at all.

 

 

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By johnjenkins
02nd Apr 2012 12:25

We can

all make things simple but that doesn't mean it's right. This "simplification" is wrong and it will end up a white elephant just as IR35 has.

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Tom McClelland
By TomMcClelland
02nd Apr 2012 12:40

Not a simplification

Introducing a new class of permitted behaviour, with its own set of rules/exceptions/caveats/statute is never a simplification.

If they want to simplify the tax system the way to do that is actually to simplify it for everyone. Not to add extra pages to the tax guides and statute books.

But that would mean fewer jobs for officials.

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By rkdia
02nd Apr 2012 13:31

What of other users?

Simplicity can have advantages but at the end of the day I wonder how many of the represented will take up the scheme when they realise that it is likely to increase income in the first year (most of the small business year end adjustments we seem to make are for creditors and accruals!) and it's not really going to affect accountancy costs unless they decide to go it alone.

I also wonder how realistic the fixed rate expenses will be.  Not generous I'm sure and given it took 20 odd years to review and amend the mileage rate. I suspect that long term use could prove costly.

A final thought - has anyone else wondered what other accounts users are likely to think of all this?  The ability to manipulate the figures could make assessments of income trends for mortgage applications, letting references, Court assessments of income for divorces, loss of earnings claims, etc interesting to say the least.
.  

 

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By The Black Knight
02nd Apr 2012 13:55

Is it beneficial for me ?

I don't know It will take me a day to work out ! can I borrow your crystal ball ?

Did I make a Profit ? I don't know would you like me to prepare a real set of accounts too ?

Based on these figures you have not done very well ! Perhaps you should stop trading and get a job with the tax office.

If you invest in stock and or the growth of your business you will never get a mortgage ! Your wife will leave you. (but this is good because as a family, forgive the pun and dry your eyes, you will be better off ! The state will give her a house for free and pay her a wage and still take maintenance from you as well as your tax payments, this helps the otherwise unemployable at the tax credit offices)

The good news is there is no tax to pay for a year and your child tax credit payments will be amazing (and that is what we are here for isn't it ?)

The simple stuff then, I am starting a business should I be cash/ invoice, what year end shall I have I do not know whether am going to make a profit or a loss and what effect will this have on my child tax credits ? ......we could work this out but it will cost you three times what it would have cost under the old system, and you will dislike the clever people even more !

You are just better off putting some income on the form as HMRC will never be able to prove any different anyway.

Simplification MY A****

We are truly all in it together................. The S***

This has to be a command from the German Federal Republic of Europe......Unless you believe in absolute stupidity....then again just look at Osborne......we have no future !

Consultation ? Having engaged before I think I wasted my time !

 

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By silicondale
02nd Apr 2012 14:27

Wrong-headed.

The real simplification that they could do is to properly integrate NICs into income tax. Not just align the thresholds, but subsume the NIC system into income tax. At the same time, abolishing employer's NIC would be a real boost to employment - even if it is compensated by increasing tax elsewhere (hey - how about adding 5% to the top rate of tax to take it up to 50%?).

Of course there would need to be adjustments for pensioners, who at present don't have to pay NICs at all, but the simple way to do this would be simply to increase the state pension to compensate for the extra tax. This would benefit the poorest pensioners, would be tax-neutral for those in the middle, and those who are better off can afford to pay the extra tax. 

There are other adjustments that would be needed too - but it would be greta prize in a simplification which at a stroke would eliminate a lof of loopholes, and would make IR35 redundant.

Cash accounting by comparison is just tinkering at the edges, and as one or two comments above have pointed out - it isn't even a simplifcation as it adds a whole new raft of regulations that will sit alongside the existing rules.

 

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Replying to Moonbeam:
Tom McClelland
By TomMcClelland
04th Apr 2012 14:29

Offset employers NI with a tax rise on higher earners? Really?

silicondale wrote:

The real simplification that they could do is to properly integrate NICs into income tax. Not just align the thresholds, but subsume the NIC system into income tax. At the same time, abolishing employer's NIC would be a real boost to employment - even if it is compensated by increasing tax elsewhere (hey - how about adding 5% to the top rate of tax to take it up to 50%?).

 

Er, I assume that remark is satire.

 

Employers NI raises about £60billion annually.

Increase high earner marginal PAYE rate from 45% to 50% and you might, with a following wind, raise £500million, unless high earners change their habits to avoid the higher rate, or go to another country with a more congenial tax regime, in which case your receipts will actually go down.

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Replying to Chipette:
Should Be Working ... not playing with the car
By should_be_working
05th Apr 2012 12:09

Tax incidence

Going off topic now, but since the incidence of Employers NI ultimately falls on the employee, a gradual shift onto the personal tax rates would make sense - but stress 'gradual'. Of course, they could offset with spending reductions (and a tax on flying pigs)...

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By jackcorr
02nd Apr 2012 14:38

Cash accounting

Small farmer

Opening livestock Year 1                         30,000

Sales during year                                                    40,000

Purchase replacement cattle                    00,000

Closing Stock                                                         00,000

Gross Profit (Accruals basis)                   10,000

 

Gross Profit Cash Basis                          40,000

Tax (say) 20%      Accruals basis       2000

                           Cash basis             8000

Obvious Cash flow implications! Or am I missing something?

===================================================

Year 2

Opening Stock                                        00,000

Purchase livestock                                  25,000

Sales                                                                   00,000

Closing stock                                                        25,000

  

Gross Profit?Loss (accruals Basis)            00,000

Gross Loss (cash basis)                           25,000

I know that farmers can use averaging but will those who don't use an accountant know this?                               

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By Charlie Carne
02nd Apr 2012 14:37

Flat rate expenses for business use of home

For smaller businesses, this makes some sense. Of course this isn't designed to provide a full picture of the strength of the business; it's simplified for one purpose only: to make filing annual tax returns easier. Any business seeking business loans, for example, will almost certainly need to provide proper accounts to the bank. That doesn't negate the value of this proposal for the many small businesses for whom the ONLY user of annual accounts is the taxman.

My main concern from a cursory view of HMRC's consultation document is that the proposed flat rate expenses for business use of home are far too low at £8/£16/£24 per month (depending on hours worked).

Take someone in employment living alone in a rented one-bed flat, then leaving their cosy job to risk setting up in a new business and having to move to a two-bed flat (with the 2nd bedroom used solely as an office) to accommodate working in the new business full-time from home. They may well face a rent increase of (to be conservative) £150 pm (or probably very much more, especially in London). Then there are additional costs of light and heat, which will be very high in winter, especially as the flat will need heating all day long, rather than an hour in the morning and a couple of hours at night. These proposed flat rate allowances barely cover the increased L&H costs, let alone the massive additional rent.

HMRC's consultation document, as noted in Rebecca's article above, is at:
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.por...

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PJ
By paulgrca.net
02nd Apr 2012 15:07

Can not see scheme being used much as it stands

Why..............

 

1. Jumping to 5th April year end would christalise overlap for many.

2. Why would you advise a new start up to use the scheme. If loss is anticipated or can be created by claiming AIA then scope to utilise loss releif not as generous.

3. Will lendors accept simplified accounts for mortgage/lending?

4. It is just so easy to manipulate profit levels high (if looking for borrowings) low (to minimise tax) - just does not mae any sense to me.

5. The manor in which the scheme is being promoted will actually discourage taxpayers to keep records (I have already had a number of clients make comments about this). How can you manage a business without proper records?

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By jtw40hcr.onetel.com
02nd Apr 2012 15:09

Simplified accounts for taxation

Adding to the methods of preparing accounts for tax purposes complicates the situation, it does not simplify. The businesses that will wish to use this method will be those that lack any management discipline, Even the smallest business should be aware of the amount they owe and are owed, what stock levels are, what amounts they have paid in advance and so on. This discipline provides a learning curve for business expansion and commercial understanding.

Those who believe that the simplified method is a way of lessening their tax burden will opt for it because it lacks commercial discipline and all that goes with it. It will lead to a lack of transparency in business transactions. Will the next step be the lack of rigour imposed on MPs before the crackdown on their excesses?

The cost of an accounting software package is small and the expertise to use it is not overwhelming.

Isn't there a concern that it will cause the problems that the preceding year basis created?

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By johnjenkins
02nd Apr 2012 15:42

The only benefit,

as normal, is to HMRC. It will make their investigations easier and less time consuming. Come on now what Accountant is going to give up the flexibility of accruals etc. for rigidity.

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By The Black Knight
02nd Apr 2012 16:04

yes but lets say

profit £40,000

Stock £10,000

WIP/ Debtors 30,000

Tax bill £9000 ish Payments on account £4500 + £4500  Payment due 31 Jan 2015

or cash basis Profit £nil tax bill £ nil payment on account Nil

Tax not due until 31 Jan 2016

TAX HOLIDAY !!! ..................TAX CREDIT BONANZA !!!!

Who's is not going to plump for that if only to avoid aggressive debt collecting phone calls from HMRC !!

The unscrupulous would charge a %tage tax saving fee on that (and no doubt we will see mass marketed) as is usually the case with these timing issues.

But the tax credits alone have to be worth a fee of £2K ??

 

 

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By johnjenkins
02nd Apr 2012 16:15

Looks like

you'll get yourself a few new clients, Black Knight. In fact you could start advertising now. "with the advent of cash accounting starting from 6th April 2013 we can advise you on how you can defer umpteen thousands of pounds legally and with HMRC's blessing".

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PJ
By paulgrca.net
02nd Apr 2012 16:26

OK Black Knight

With your example you have a happy client. Next week they come and tell you they want a mortage to buy a new house - what do you tell them now?

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By johnjenkins
02nd Apr 2012 16:30

The truth

as always.

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By The Black Knight
02nd Apr 2012 16:38

Creative accounting !

Make up some new numbers ! on a normal basis ? explain to said bank manager that tax return figures are not the real ones! ....just like the bad old days ! ( apparently still happens !)

he can report to SOCA and we can claim the investigation fees on the TAX fee save bend it like Beckham scheme. (if we could get SOCA to pull their finger out of their proverbial)

You appreciate that my work is satire ?

as the client will want to pay no tax and have a mortgage then HMRC will say that the income does not meet the mortgage payments and we will spend hours explaining cash and profit to brain dead inspectors or their dogs.

May you live in interesting times....

I wish I had been a plumber....tax aside I could do with this much in my wardrobe.

http://nds.coi.gov.uk/content/detail.aspx?NewsAreaId=2&ReleaseID=423911&SubjectId=2

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
02nd Apr 2012 20:48

What an interesting discussion!

John J - you always bring me back down to earth when I get carried away by my optimism!

A couple of observations:

1. The idea that buying stock before the year end to avoid tax is not really an issue for these small businesses - cashflow just won't permit it. Why would you support a bank overdraft to hold stock that you haven't got space for?

 

2. I deal with many many unrepresented taxpayers through my software company helpline. Mainly v small partnerships. Most of them haven't got a clue! I had a customer talking about depreciation, which I tried to explain had to be added back and capital allowances claimed - I asked what asset the depreciation related to? "someone who didn't pay us" was the response. Words failed me!

3. For pretty much all of the affected businesses, capital purchases come within AIA (excluding cars on which it isn't available) so the distinction between capital and revenue is already gone.

4. Yes I would love my clients to understand their P & L and use it to manage their businesses, but for most of these clients, it is available in January after the tax year ended and therefore as much use as a chocolate fireguard by then!

However, I'm still worried by the complexities and not sure that the unrepresented can grasp the finer points. And will my (or your) tiny clients pay for an accruals basis when a cash basis suffices?

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Replying to taxiboy:
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By The Black Knight
03rd Apr 2012 09:19

Whatever the system they will get it wrong anyway !

RebeccaBenneyworth wrote:

 

1. Why would you support a bank overdraft to hold stock that you haven't got space for?

2. Most of them haven't got a clue! I had a customer talking about depreciation, which I tried to explain had to be added back and capital allowances claimed - I asked what asset the depreciation related to? "someone who didn't pay us" was the response. Words failed me!

3. For pretty much all of the affected businesses, capital purchases come within AIA (excluding cars on which it isn't available) so the distinction between capital and revenue is already gone.

 And will my (or your) tiny clients pay for an accruals basis when a cash basis suffices?

1. For the same reason a former bank manager explained to me that he had been using his phone as much as possible to reduce his tax bill. Doh that's the level of understanding we are talking about here.

2. They don't have a clue I agree. For the same reason they did not have a clue at school either... cash accounting will be even more complicated.

3. Agree there, but I have had enough trouble explaining why one of my small clients (< 70K pa turnover ) bought a tractor because he had the cash to do it....can he get a mortgage ! Nope

Will clients pay NO! the accruals was a much cheaper version because you did not have to have a balance sheet and or do any reconciliation work.

They will pay a lot more tax though!! On average I save between 3 and 6 times the accounting fee (which includes the compliance bit) every time I advise these small clients...nothing fancy just getting the basics right !

Quite frankly a business that does not issue invoices and record them as sales, will forget to collect their money anyway, and is perhaps not a business but disguised employment ?

We have had a huge fuss about proper record keeping and now we have this ? It just defies all logic !

I expect a raft of offshore trust and loans and barter schemes etc to avoid a cash payments, just like there are with employee packages where salary is paid via a loan account (repayable yeah right)

I have seen self employed (employees really) mechanics on £20K per year paid via Isle of man companies, no particular scheme, but client told no tax.

We will loose some fees sure, but HMRC will loose a lot more tax ! ha ha

 

 

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By John Snowden
03rd Apr 2012 08:42

Simplification?

It all looks a bit complicated to me. Those who are capable of keeping decent records but who are eligible will want to know 'which basis will be best for me?'; those who are not will get even the cash basis wrong, and over the long term will likely pay more tax anyway (eg because use of home allowance will be set too low, interest disallowed, loss relief restricted).

In essence the so-called simplification rules boil down to questions of timing, estimation, restrictions on allowability of expenses and tax relief for deficits. It seems as easy to me to add up invoices etc as money received.

I would agree with the posting above that the best bit of simplification that could happen would be the complete merging of NI with tax, as suggested. I also think that to reduce the number of special schemes would be a better approach than to create more.

(And, in passing, is seems to me that the VAT Flat Rate Scheme - a supposed simplification - is actually a complete economic (and accounting) distortion.)

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By The Black Knight
03rd Apr 2012 10:13

tax timing ?

Just some interest ?

or a massive boost to a primary source of profits .....TAX CREDITS..... that will be the driver here I think.

And even easier to manipulate than before !

We need to milk this to the extreme as it is the only way we can show it is a bad idea ! Just like the 0% corporation tax rate...they were warned about that too to no avail.

If they won't pay for the advice Give free consultations.

Is beer a cash equivalent ? or just a loan till I buy one back ? Can feel an artificial split coming on (boy that felt good ) or just a gift.....never show up ? and you can't remember how many you had in the morning or enter into a contract ? mmmm I expect they will want to micro chip everyone and record their conversations via their mobile recording devices.

This is a matter of saving the country from the lunatics......how simple do they want an expense claim...and they are supposed to be the clever ones with good educations.

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By pauljohnston
03rd Apr 2012 11:59

S|implified System

Perhaps HMRC should look overseass.  I believe in Spain certain shops pay the equiv of corp tax/income tax based on the square footage of the shop...

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Replying to kevinringer:
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By The Black Knight
03rd Apr 2012 12:14

We have rates ?

pauljohnston wrote:

Perhaps HMRC should look overseass.  I believe in Spain certain shops pay the equiv of corp tax/income tax based on the square footage of the shop...

Can I have lie down at lunchtime too ?

Don't give them any more ideas..

We would need to consult whether that was shop floor or frontage or the bit covered by stock.

In Greece they don't pay tax because the stupid English pay that for them !

That is outrageous that they are still not using metric though.  That is a very serious issue.

 

 

The whole point of a complicated tax system is that it is fair and influences behaviour !

Why should I pay tax on my work in progress when Mr Cash in hand does not ? And why should they get more tax credits on the same profits than me ?

This is really unfair !!

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By MK1
04th Apr 2012 09:16

HMRC consults on simplified tax accounts

Simplified Tax Accounts

Why do government officials have to keep making adjustments to the system, when they are not required? Why is there a need to simplify the system? Accountants in practice use conventional accounting concepts to prepare accounts, whhich is what they have been trained to do. Accountants fully understand how to prepare accounts and the majority keep to a high professional standard when doing this.

If government officials think that this will help the general public then think again!!  I read an article recently wher tax officials are realising that the accounts submitted by Joe Public have quite often been submitted in error and are now they are seen as ripe for investigation!!!!

As a professional i think we have enough to get are heads around what with the general changes in each budget, the introduction of IBRXL and more without unneccessary changes dreamt up by goverment officials.

I have come to the conclusion that the "simplification of the tax system" and the "red tape in business" are topics that goverment officials give lip service to as it sounds good. In reality they have not got a clue as to what true proffesional have to put up with in respect to the interpretation of the tax laws relating to business.

Regards

Overburdened Accountant

 

 

 

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By The Black Knight
04th Apr 2012 09:38

The Fundamental Problem

Is that they do not understand accounts whether small or large or UK Plc, or even expense claims.

Which is why we are in such an economic muddle !

Add this to the new (last 20 years) problem solving technique of brushing it under the carpet and this is what you get.

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By johnjenkins
04th Apr 2012 09:43

Perhaps

the EU want simplified cash accounting so that their accounts can be finally ratified.

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By pauljohnston
04th Apr 2012 12:40

@john

The problem is that EU bookeeping does not use double-entry, just single entry and all expenses and other outgoings are fully alowable.  To balance it just puts up the contribution fee from each member state

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By The Black Knight
04th Apr 2012 14:38

I H T ?

If a few more superstars suddenly died then the lack of IHT planning at that stage must raise quite large sums ?

I always think that when these pop-stars keel over.

I think one of the roman emperors introduced IHT and then because it was not working fast enough he decided to accelerate receipts by the hand of God.

Nero or Calligula ?

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By johnjenkins
04th Apr 2012 14:53

Why not legalise prostitution?

That should fill the financial hole quite nicely. You could have a Whipping, Masochism and [***] tax. You could even call it A WMD tax. It would hit the rich more than the poor.

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By ringi
04th Apr 2012 15:35

SIMPLE business that don’t have loans or a lot of stock

I expect this will only be used by small SIMPLE business that don’t have loans or a lot of stock. 

A good example would be the brick layer that has just rebuilt my garden wall, he does not seem to keep many records, however he asks for all payments to be internet transfers into his business account and mostly gets the client to pay the builder merchant directly for the bricks etc.   (He is a business as it was fix price labour quote for the job and I am a home owner)

He told me that most people pay him within a day or two of the work being finished and most jobs last less than two weeks, he does not have an accountant.

Remember that all of this is opt-in, and the type of “business” it is aim at are unlikely to be your clients.  Hopefully a new start-up will not have to decide if they are opting-in until they come to do their first tax return and now if they are likely to have losses etc.

I see no reason way a mortgage lender would not be happy with 3 years copies of the bank statements and tax returns for this type of business, as manipulate profit levels up is hard to do over more than one year and no one will be willing to pay a lot more tax for the sake of it.
 

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By The Black Knight
04th Apr 2012 15:36

I thought it was ! Damn

Perhaps a window tax ? To tax peeping toms that are spying on the rich.

I think the above should be a P11D item anyway.

Seen a receipt for one of those (the D) in sundries during an investigation.....inspector had me on that one didn't even argue.....and still got a refund for the client !! (I didn't do the job to start with I hasten to add)

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By johnjenkins
04th Apr 2012 15:59

@ringi

Try giving a lender 3 years bank statements and tax returns and you will find, unless LTV is well under 50% they won't even entertain you. Some lenders still ask for Audited Accounts for the self-emloyed.

I think the trend a few years ago was to "go it alone" but these days there aren't many business that do it themselves.

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By thomas34
04th Apr 2012 16:27

Post Number One

Can't really say any more but this could potentially be a P.I. nightmare - all due to the OTS.

We'll need to calculate profits twice, once on the proper basis and once on the cash basis. If the cash basis gives a better result in year 1 (possible where a trader has debtors, no creditors and a small pool brought forward), are we negligent by advising the client to stick with the proper basis because long term the same total profits will be assessed?

Will we need to calculate the interest lost by the client paying some tax in year 1 rather than year 2 onwards?

It will mean creating a hand out for all relevant clients explaining the two systems but at least we've got a year to do it. Whether I shall need to get some sort of disclaimer each year from the client I don't yet know.

I do know that I shan't be able to charge any more for my services as a result of this hair-brained scheme.

However there will be an opportunity for someone to devise a relatively simple software package to calculate the different results - I think I might have a go at it.

Thank you the OTS.

 

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