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OTS calls for cash-based tax accounting

29th Feb 2012
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The Office of Tax Simplification (OTS) has said that the smallest businesses should be allowed to use receipts and payments accounting instead of complying with full GAAP accounts. 

The announcement ties in with the recent European directive and looks like momentum is building towards government endorsement of a cash-based accounting regime.

John Whiting, tax director for the OTS, said there's a strong case for a form of cash accounting and that we need to think about “going further” in calculating tax for the smallest businesses.

However some commentators, including many on AccountingWEB, have warned about the deeper implications of such as development. AccountingWEB contributor Steve Collings cannot see any merit in changing the methodology of producing accounts for the purposes of tax.

“I fail to see how changing (from an accruals basis to a cash basis) is going to reduce red tape for businesses,” Collings said. “They should be looking to simplify the tax system – accounts preparation isn’t a problem, albeit some of the statutory disclosures could do with stripping away.”

He added that proposals to change pensions legislation for smaller companies (bringing in the statutory NEST provisions) is on the horizon in 2014/2015, so government seem to want to “give with one hand, but take with the other.” 

Collings also fears that if the proposals for a cash-based accounting system comes in, we will go full circle again and something will go horribly wrong in the future, such as large scale tax evasions or other ‘scandals’ befitting small companies.

“Then we’ll go back to where it was originally with a whole load more regulation thrown in on top to try and stop further scandals,” he added. “I’m all for simplification, but if they’re focussing on micro-entities, why not keep the existing accruals based, but do away with some of the disclosures.”

Richard Murphy added more words of caution about the new proposals: "This suggestion only applies to businesses turning over up top £30,000, but as a result it then, immediately creates a new problem for the small business sector, which is transitioning from one accounting system to another with a host of transitional rules to then comply with."

He added: "HMRC have always known simplified accounting was an invitation to evade tax: I recall being told by HMRC statisticians about the astonishing number of businesses with turnovers just below the threshold for submitting three line accounts. This proposal has all the same risk of encouraging evasion in it."

"If there is a case for change, then let's make it a real one. Let's keep income in accounts on an accruals basis, but by all means go for flat rate accounting for expenses, and maybe on turnover up to £100,000. But there should be a quid pro quo in this. The first is that all small businesses, companies included, should disclose their turnover with their top ten customers or their weekly sales takings if no customer exceeds 10% of turnover. That will identify false self employments and falsified sales figures and that's where the tax gap is in this sector. Which is why this data should not be optional, even if the flat rate expenses are."

The OTS also recommends a wider range of flat rate expense allowances be available.  These methods should be the default option for qualifying businesses, with an “opt-out” allowing those to select the system that is most beneficial to them.

In additon to the accounting reforms, the OTS proposed a new tax relief to help companies disincorporate without incurring significant tax cost. This would parallel the existing incorporation relief, the OTS explained, and would have the dual benefit of reducing admin burdens while helping businesses to reorganise so they can trade in their "correct" form.

Click here for the full report on the OTS recommendations on small businesses. The official consultation paper is scheduled for July.

See also:

Simon Sweetman: The OTS speaks

Replies (53)

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By Paul Soper
11th Mar 2012 18:20

What do you call the excess?

In my youth we had a description which aptly described the accounts prepared by small sole traders - the excess of income over expenditure - a very honourable accounting concept that goes back many, many years.

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By johnjenkins
11th Mar 2012 19:00

Sorry Paul, I

have never in 47 years used income over expenditure to indicate profit or loss.I have, and still do, use that expression for accounts where there is no tax due like Property management accounts or charities etc. I just wonder what other Accountants have used over the years, and perhaps different parts of the country have used different expressions.

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By DMGbus
11th Mar 2012 19:15


"Financial statements" - NEVER used (instead use "Accounts", plain English)

"Income & Expenditure Account" - Used for non-profit making organisations such as very small Clubs

"Profit & Loss Account" - Used for computing profits for businesses liable to tax

"Receipts & Payments Account" - Used for small charities per Charity Commission guidance, also has application for cash accounting proposals being discussed.


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