HMRC consults on simplified tax accountsby
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.
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.
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.
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.
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.
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.
- 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.
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.
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Rebecca trained in London with Kidsons and, on qualifying, spent some time as Chief Accountant of a manufacturing company. She now has her own small practice in Gloucestershire that comprises of owner managed businesses and small companies.
She also lectures extensively for a range of professional bodies, accountancy firms,...