Tax for the smallest businesses

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Simon Sweetman
Tax Consultant
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The Office of Tax Simplification (OTS) continues to beaver away. While some people find it easier to mock rather than produce ideas, it has come out with two new documents, explains Simon Sweetman.

One on a possible disincorporation relief and the other, which I want to talk about here, on the possibilities of easing the difficulty of completing a tax return for the very smallest businesses, not forgetting that there are two million businesses in the UK that turn over less than £20,000 a year and another million turning over less than £70,000 and so below the VAT threshold.

Or at any rate that’s what they tell HMRC. One problem for HMRC, of course, is that there are now twice as many small businesses as there were 25 years ago, so there is less chance of looking at them very closely. But tax law and practice is exactly the same for them as it is for other traders, so the law says that they should prepare accounts in full accordance with GAAP (debtors, creditors, prepayments, accruals and all, not to mention work in progress). And then they should make any necessary adjustments for tax purposes.

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15th Aug 2011 13:31

Tax simplification


The main problem with these proposals is that there will be some winners and some losers; but all will consider they are being unfairly treated.

Any proposal that brings about a two-tier system should be avoided. Someone selling combine harvesters may have a turnover of £12 million but a profit of only £10,000 or even a loss. A bookkeeper may have a turnover of £12,000 but a profit of £10,000. Turnover should never be used as a basis for assessing profit.

These proposals will bring about yet another set of rules requiring more legislation with the inevitable anti-avoidance provisions resulting in more complexity and problems.

Accounts are not just prepared for tax reasons; anyone in business needs to know whether they are making a profit or a loss.

It would be much more help to everyone if the stupid 5 April year end date be changed to 31 March or better still 31 December so that it coincided with the rest of the civilised world.

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By alan159
to The Black Knight
15th Aug 2011 14:29

Tax Year

Sharland wrote:
It would be much more help to everyone if the stupid 5 April year end date be changed to 31 March or better still 31 December so that it coincided with the rest of the civilised world.

I have always thought this, I would like to see the tax year aligned to the calendar year at least to 31st March.


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15th Aug 2011 14:55


I shall be grateful for a note of the legislation which states that traders "should prepare accounts in full accordance with GAAP ."

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15th Aug 2011 17:31

not full ? its just GAAP

but the legislation is s25 ITTOIA 2005.


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to SteLacca
03rd Feb 2014 15:26


A belated thank you to the Black Knight.

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15th Aug 2011 17:58

fair is the word

There needs to be some complexity for the system to be fair, clearly one shoe does not fit everyone, Unless the OTS (who perhaps have never been anywhere near a small business but now profess to be experts on) think everyone should be made to run a business exactly the same way.

Surely it should be my choice whether I invest in new equipment, advertising etc and pay less tax than someone that does not. Are they really trying to stop investment ? looks like it.

3 line accounts with no expenses ??? mmmmm now what does that bring to mind ?

1. Not self employed ?

2. Any old figure will keep them happy ! And it does funny enough.

3. The tax payer has already simplified his accounts and already paid some more tax but importantly saved a lesser accountancy fee.

Quite frankly they ave not got a clue !

I hardly think the saving of a small accountancy fee, which often at this level includes writing up the books and records for the year is going to make any difference other than lead to the loss of a lot of tax, added to which a two tier system is going to add to the cost of accountancy fees for those that still prefer their accountants to do the work.

Added to which clients of this size also receive lots of help and advice that is not charged for but keeps them legal and avoids pitfalls other than tax and steers them in the right direction, we are after all real business advisers as well, rather than pretend ones.


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16th Aug 2011 09:34

Small Business Tax & Simplification

I have always thought that Employer's NI is an iniquitous tax on jobs. This year they put that tax up by 1%. Surely the result would be for potential employers to either think twice or create part-time jobs instead of full time jobs (yes, this was borne out in some recent national figures I heard & has been a strategy I have used in my own small business).

In a time of high unemployment  & with the stated Government's aims to simplify tax what else did they do this year? They split the thresholds for employees and employers paying NI causing more complicated calculations & business time spent calculating the results. Secondly, they put more burden on the employer by making their NI threshold lower than the employees!

When are Budget reviewers & discussion groups going to wake up to this issue? All forms of tax and National Insurance go into the same government spending pot today. NI contributions I make today are NOT being set aside by the government for my old age, they are just a tally as to whether I will get a minimum State Pension at some future date.


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16th Aug 2011 16:08

Dumbing down

The government line is that everyone can do their own tax returns and do not need accountants or tax professionals.

The missed reliefs are nearly always greater than the accountancy fee would have been.

Penalties for non compliance are sky rocketting.

Entrepreneurs are good at what they do, and often not good at the ridiculous bureaucracy surrounding it - many struggle with literacy.

Accountants are often the only source of support and advice for these people.

And we struggle to keep up.

Small businesses are being set up for a fall.

What happens when it all becomes too much trouble?


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By Joss
17th Aug 2011 15:08

making a simple option for small traders

In my years as an accountant, I have encountered at least 2 sole traders who never grasped the difference between VAT, PAYE, CIS and their own NIC & Income Tax. When they got correspondence from HMRC they never understood what they were being asked to pay for. It got worse when NICO & HMCE merged with IR and all the letterheads said HMRC. These clients really couldn't tell who was writing to them. The concept of different reference numbers for different types of tax... well it was entirely beyond them.

But they were excellent at the construction services/ supplies they provided and really worked hard, often working away from home for weeks at a time (in digs, working long hours nowhere near a computer or a desk)

Bizarrely, they both perfectly understood and even liked the old construction industry SC60 system. For the uninitiated, it worked like this: trader deducts 25% off all payments to their subcontractors (subbies), trader keeps payment & deduction record for each subbie throughout the year and totals it at the end of the year, trader gives each subby a single tax voucher at the end of the year showing the total figures, and hands over the tax they have deducted to HMRC. Payments to HMRC were supposed to be monthly but in practice they were often erratic because the trader would catch up when he was at his desk and able to bring his records up to date. When the payment recording cards were dropped, my clients stuck with it but when the system changed to CIS and neither the vouchers nor the payment recording cards were available from HMRC and then the rate of deduction changed a couple of times, not to mention that they were supposed to send HMRC a monthly report, they got completely lost despite valiant efforts on my part to provide them with substitute stationery and inform them of the rate(s) to deduct. When asked at the end of the year for paperwork relating to verification codes for any new subbies, they just looked at me completely blank. I might as well have been speaking in tongues.

For such business people, it is as if the paperwork world that we live in is so far removed from them they just cannot conceptualise what it is that we are talking about. They have no bearings and lose their way easily. They understood the paper tax return thudding onto their doormat meant it was time to visit the accountant. Any paperwork arriving at other times just confused them and they tended to keep it to show me a year later when handing me their books. They cannot afford the support of an accountant in-year, only at the end of each year. The funds they have available are insufficient for them to be able to commission someone to undertake their tax compliance work other than once per year despite the continual changes and large volumes of paperwork issuing forth from HMRC and so the clients can quickly and easily get things wrong merely by continuing to do things the way they have always done them.

A system that works well (and is still going strong) is the VAT Flat rate scheme (FRS). All my clients who are on this and combine it with cash accounting love this turnover-based scheme. I like it because the chances of errors are significantly lower and because there is a rate to fit most businesses.

In my opinion, something similar to the VAT FRS could work for sole trader income tax. But it must be optional because some traders might be making losses or low profit margins and because some traders simply take years to get around to organising themselves to look at any regime changes.. Traders with expected turnovers below £20,000? could apply . There would be different rates for different trades. Assuming they banked all their turnover, they could calculate their liability by adding up the amount they had banked for the year and applying the relevant percentage. Capital Expenditure exceeding £2K could be claimed as an expense. So far so good, but if class 4 NIC was to be caught in this simplification a whole raft of issues then arise. The trader may or may not have not any class 4 liability and this position may change from year to year.

Using turnover receipts as the basis of charge would mean that reported turnover could be very erratic. The accruals rule would not be applied so work in progress, debtors & accrued income would not be considered and a big job nearly completed at the end of the year would find itself in the following year - when the customer made a payment. This would make it hard for HMRC to monitor any kind of pattern or fairly target enquiries. Conversely, I think traders who take no professional advice would not generally apply the accruals rule in any case. In conclusion, applying an IT FRS charge rate to unadvised traders' turnover receipts would only change the compliance rules to match the status quo.

More than anything else, while we keep the current system, I would like to see one of the following in emboldened 30pt  in the top right corner of all HMRC written correspondence - so when clients ring me about the correspondence they have received I have a clue what they are talking about (and so do they):-


And as a final point, has Income Tax been re-named "Self Assessment"?? Where exactly does it say on an SA statement the type of tax that is being collected? Is it a secret? HMRC helpline staff have even talked to me about clients "paying their self-assessment". Hardly surprising if the statement they are reading does not make clear reference to Income Tax.

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17th Aug 2011 15:23

well said Josh & Kim

Vat flat rate scheme, seems to work well however when we see clients that have done this themselves they seem to make just two errors , the turnover and the percentage rate.

The other issues they are usually oblivious to.

so I am not sure that an adviserless flat rate system would work either.

FRS5 apart what could be simpler than sales... list and add up your sales invoices, expenses gather your receipts and list and add up.

surely cash accounting is more complicated , and don't even mention bank reconciliations.

In any case those not using an agent would not be familiar with accruals accounting and so have already defaulted to a HMRC approved (by blind eye) quasi invoice / cash system that makes sense to them anyway. .... So why does anything need to be changed at all ?

HMRC inspectors will also have to be aware of two systems and many do not really understand accounts anyway as they are.

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By barron
20th Aug 2011 21:54

Small businesses

Most of my clients are using manual system for recording transactions. Computers are not used and certainly no lilihood of using broadband. It is therefore very difficult for them to receive information as websites are  foreign to them.

Personally although being computer literate I am not the slightest interested in looking at websites as they take too long to look at and to find your way around. HMRC website I have extreme difficulty in finding current information usually it is a year behind at least!

Most of my clients do not have computers and if they have are not on line which makes life extremely difficult.

Pen and ink are much the best form of communication as long as HMRC bother to reply.


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