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The Office of Tax Simplification speaks

2nd Mar 2012
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On 28 February the OTS published its final reports on small business issues, which are broken down into three documents, dealing with the following issues, explains Simon Sweetman:

  • HMRC administration
  • Simpler income tax for the smaller businesses
  • A new relief on disincorporation

These are of course recommendations to the Chancellor, who may take what notice of them he pleases. Potentially there could be announcements or even legislation in the budget, though it is perhaps unlikely that things will move so quickly. And of course the dead hand of the Treasury may emasculate any proposals.

But it looks as though there will be a disincorporation relief, which may be good news for people trapped in an inappropriate form. It will however only apply to trading companies, so is of no help to those with companies only holding real estate.

And for (very) small businesses the right to provide accounts of income and expenditure rather than fully GAAP-compliant accounts will be legally recognised (instead of their being accepted with a nod and a wink, as they are likely to be at present). This really applies to a very considerable number of businesses with a turnover not exceeding £30,000, most of whom do not use accountants and probably enter their figures straight onto the tax return. Their problems are not by any means the same as those of slightly larger businesses that may have to grapple with VAT and with employment issues, most of which are not tax-related.

It is fairly clear from the proceedings of the consultative committee here that the very small businesses have not really been seriously considered before, probably because they have nobody much to speak for them. Since they often do not use accountants (and those that they do use are frequently cheap and cheerful and unqualified), they are below the radar of the accountancy bodies who are regularly part of HMRC consultations. Even sitting on committees representing the Federation of Small Businesses, I knew that our membership included very few of these nano-businesses. Even the surveys carried out for the OTS were much more likely to find the small employer than the singleton business. It seemed hard at times in the consultative committee to get people to concentrate on these very small businesses, which will not (for instance) incur substantial capital expenditure (and for whom the AIA has already been a simplification. This indeed is typical: the value of the AIA has been constantly denigrated by people whose clients spend more than this on plant and machinery every year. These are the sorts of very small business who may buy a computer or office furniture in the course of a year, but nothing larger.

There are also far more of these businesses than there ever were. With the economy in its present state, many people who are made redundant will throw their redundancy money into a small business: self employment under the banner of entrepreneurship has never been more popular.

Along with the possibility of income and expenditure accounts (just don’t say “cash basis”, that’s all – the term means very different things to different people), there may be standard allowances for various expenses. What is suggested is

  • Use of home – standard or higher flat rate amount per week
  • Mileage – Approved Mileage Allowance Payments (AMAPs) with no upper turnover limit, and new AMAPs for vans
  • Capital items – allowed as a deduction rather than capital allowances
  • Private use assets and services – disregard limited private and business use
  • Telephone, mobiles and internet – a standard allowance or “disallowance”
  • Subsistence – improve guidance and consider use of flat rates
  • Laundry – same rates as used by employees and
  • Postage and stationery – allow estimates for small amounts or flat rate amount

This all seems to me to make sense, though it could distract from the message that you should still keep proper records. What remains to be seen is whether the Treasury or the Chancellor will decide against grasping this nettle. 

Replies (14)

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By dstickl
02nd Mar 2012 19:29

IR35 & OTS & HMRC note < 3 weeks to Budget Day! KISS!

Simon’s words of:

QUOTE There are also far more of these businesses than there ever were. With the economy in its present state, many people who are made redundant will throw their redundancy money into a small business: self-employment under the banner of entrepreneurship has never been more popular. ENDQUOTE

seem to me to be a promising vision of a tidier future where IR35 could be made more focused, and more consistently and effectively policed by HMRC for high visibility cases only, thus: 

Replace the words "by 5%" in ITEPA 2003 s 54 (1) Step 1 with the following: "by a monetary amount that is the greater of either (a) the VAT registration threshold for a worker who did not work for a period of at least three hundred and sixty six calendar days after the date his or her previous contract for service ended or (b) five per cent for all other workers."

OTS & HMRC note < 3 weeks to Budget Day!   KISS!

Thanks (0)
Replying to simonemery:
Wild Billy Hickok
By Wild Billy
02nd Mar 2012 21:33

IR35 (again)

This ridiculous obsession with IR35 is now boring. Not EVERYTHING is about IR35. The boat has sailed. The OTS, including John Whiting, looked at it, made its recommendations (which the Government are acting on) and has moved on to matters that affect FAR, FAR more small businesses. In fact, your reply proves Simon's point very well; by getting obsessed and sidetracked by pet hates, we miss focusing on the issues that are far more meaningful to millions of businesses.

Now, let's talk about what the OTS has actually recommended in these reports...

Thanks (2)
By dstickl
03rd Mar 2012 09:45

@WildBilly: IR35 seems still in OTS's "first stage", hence ...

Interesting that “Wild Billy” refers to Mr John Whiting, Tax Director, OTS, who emailed me back on 12 April 2011 on my "OTS invited" feedback about their OTS-IR35 report stating in part:


You point out that that we do not say that simplification should make ‘economic sense’. That is a fair challenge: in our defence I would simply say that we took that as implicit. Simplification moves that do not make economic sense will not be effective simplification.


and John Whiting also wrote:


You also raised the question of the way a 5% deduction might work in the context of a possible flat rate scheme for the smallest businesses. I do not think we have ruled out the sort of alternatives you suggest. Our aim was to sketch out what we see as a promising route for an alternative approach to the smallest businesses. If we can develop this further, points such as yours will be important in fleshing out the idea. But the first stage is to try and show that this route is viable and worth considering further.


SUM UP: IR35 seems still in OTS's "first stage", hence contrary to Wild Billy: the IR35 "boat has NOT sailed", we have dstickl's noble follow up to the TLRC 1997 steer 1.9 p 2 of the need for 'economic sense', including to recognise and resolve the very small business dilemma of significant fixed start-up etc costs, apparently to be recognised by a "5%" allowance of a very small variable revenue, etc. 

BTW: You are right, Wild Billy, that some other small businesses have other concerns too! BUT please, as a professional who aims to make timely comments, I have to ask you: Why didn't you take the opportunity of your post to set out your other thoughts for us to see, as time is so short to Budget Day 2012?   I look forward to hearing from you!

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By dstickl
03rd Mar 2012 18:53

@WildBilly:IR35 seems 2 B in OTS's 'HMRC Administration' report

Hi WildBilly: IR35 seems to be in at least part of OTS's four reports, on their end Feb'12 website, which I've skim read via google. May I please draw your attention to ‘HMRC Administration’ OTS report Page 6:

QUOTE One point to highlight is that those who come to this report expecting to find a single “blockbuster” change that will solve all small businesses’ problems with the tax system will be disappointed. The OTS has found much that is working well with the current tax system but, at the same time, there is scope for changes that will make a genuine difference. Many of the points made in Chapters 4, 5 and 6 are relatively minor, but taken together they will make a material difference. Also, the ten areas listed within Chapter 7 are a significant agenda for change.

It is the view of the OTS that tax administration for small business must be kept under review with any changes evaluated and, where appropriate, improved on. The OTS experience suggests that taxpayers are more willing to offer challenging and candid views when speaking to a third party. There is a clear ongoing role for groups such as


AWEB, in my humble opinion, hence my running commentary in the run up period before Budget Day 2012.

Also on Page 8, regarding IR35:

QUOTE The original terms of reference for the OTS’s review of small business tax required us to consider the specific issue of IR357. Two lead options were put forward in the interim report on small business tax:

either suspend IR35, with the intention of subsequent permanent abolition (subject to the effect on behaviour and fiscal cost);

or keep the legislation unchanged but make explicit commitments to improve the administration.

In Budget 2011 the Government agreed to take forward the latter of these two options.

Issues raised with the OTS included the fear of investigation, the length of time an investigation takes and enabling individuals to self certify their IR35 status with a greater degree of certainty. The Government is working on a number of new initiatives including focusing more on those who use personal service companies to disguise employment, rather than on those that may have just an isolated contract that may breach IR35, and publishing guidance to indicate where there is a low risk of falling foul of IR35.

As with income tax and NICs, IR35 is a subject mentioned regularly in our more recent research. We reiterate the need to make substantive progress with the project set up in the wake of our previous report; we understand that changes may be introduced from April 2012, which will be welcome.


CONCLUSION: Contrary to your assertion made yesterday:  The IR35 boat has NOT yet sailed, methinks!

Thanks (0)
Replying to Tim Vane:
Wild Billy Hickok
By Wild Billy
03rd Mar 2012 20:56

The Boat HAS sailed....

Look, I have limited patience to keep explaining this. It will be the last time.

The OTS dealt with IR35 in its interim report and reached its recommendations in relation to IR35 in THAT report. It does NOT deal with IR35 substantively  in ANY of these latest 3 reports because these deal with the second stage of the review. The quote that you highlight is, clearly, simply an attempt to mention IR35 and tie all the strands of the small business review together.As you point out yourself, the Government gave its reaction to the IR35 recommendations last year. This was to REJECT legislative change or abolition and, instead, set up a group to improve the ADMINISTRATION of IR35. THAT work is continuing and is very clearly what the OTS is referring to: . Once again, it is NOT looking at the legislative change that you keep banging on about and the Government has rejected that. So the boat has sailed for you.

So, please, stop. Keep writing to the Government by all means. Write every day and twice a day at weekends if it makes you feel better. But please stop hijacking threads when we need to encourage proper discussion about issues affecting far more than personal service companies etc. The OTS has just concluded an 18 month small business tax review and you might think that its actual results would be of interest to people here given how much we complain about complexity and the vast majority of our clients are small businesses. So let's discuss the actual recommendations because that is what is likely to be coming down the line in a few months and NOT your pet campaign because it is boring me (and I suspect others) to death.

Now, I'll be very happy to engage in a conversation about the 3 reviews- I have some views- but I'd be interested to see what others think first before nailing my colours to the mast.

Thanks (3)
By daveforbes
05th Mar 2012 11:08

@oldersimon - £30,000 ?

The original post mentions £30,000 as a threshold for "not preparing full GAAP accounts"

Do you know where this figure has come from ?

The the limit for TLA ("three line accounts" - turnover, total expenses and profit) on the the short self employment pages of the SA100 is now aligned with the VAT threshhold - £73,000 for 2012.

That is considerable higher than £30,000.


David Forbes


Thanks (0)
Nichola Ross Martin
By Nichola Ross Martin
05th Mar 2012 12:08

£30,000 - an error or intentional?

I wondered that but i think that they have used £30,000 intentionally as the cut off for a micro business. It is unrelated to the three line accounts disclosure is just for SA.

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By johnjenkins
07th Mar 2012 09:39

I challenge the

assumption that most business with a turnover of £30k and under do not use accountants. You've only got to count how many subbies there are. What is quite saddening is after all this time the OTS can only come up with something that is already done (as oldersimon says with a nod and a wink). It really begs the question is OTS going to end up like WT as a PR exercise that really won't do any REAL change and deal with REAL issues. Let's hope that agent stratedgy will change the tide.

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By may2011
07th Mar 2012 11:55

no nods or winks

There has never in my time been a requirement for a sole trader or even a partnership to prepare a balance sheet. I assume this was based on the assumption that tax payers have the right to make their own tax return without employing an accountant. So in theory you could be turning over £100,000 and not employ an accountant or prepare a balance sheet. There have never been any nods or winks - it is a concession for non incorporated businesses.

The anomoly lies in the fact that you would still be expected to include debtors in your turnover at that level.  I don't think anybody would worry about them at the subbie level. Income and expenditure was all that was expected from micro businesses and subbies and all that a lot of accountants bothered to prepare for them.  In reality debtors and creditors etc only make a timing difference; the treasury is not deprived of any money overall if accounts are prepared on a cash accounting basis.

The only problem with the concession is that it probably should not apply to all non incorporated businesses.  To rationalise it you just need to decide on the criteria for permitting cash accounting and give clear instructions on the SA.  Anyone not covered by the concession should complete the balance sheet. 

But working out how much they have earned is not the big problem for the micro business - they can usually tell you that straight off.  They just can't fill out the form or file it online.  That is where the complication lies and why they still employ accountants.

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By The Black Knight
07th Mar 2012 12:33

lets hope that we do not get stupid

Questions from HMRC !


Like: Why has the turnover dropped dramatically from this year to last ? Could we please see the diaries.

Why have the gross profit percentages not remained consistent.

In fact HMRC now have no chance of spotting an incorrect return !!

Another problem under the carpet !!

LOL one early payment and you could fail the test.......lax credit control the order of the day...really helpful.

We all know the tail often wags the dog !!

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By johnjenkins
07th Mar 2012 12:43

Unfortunately I have

come to the conclusion that the OTS aren't allowed to do anything of REAL value. They had their proposals for IR35 thrown out and were probably told then only to play around the edges but don't mess with the core. Shame really.

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By The Black Knight
07th Mar 2012 12:57

Qe ?

"Along with the possibility of income and expenditure accounts (just don’t say “cash basis”, that’s all – the term means very different things to different people), there may be standard allowances for various expenses. What is suggested is" YEP

If only they had known that's what happens in real life anyway ! LMAO


Clearly cash accounting does mean different things to different people who don't know any better !!

Are we cash accounting ? as inferred by earlier AWEB articles or invoice accounting ?

Whether it be for an income and expenditure account or not ?

Businesses of this size rarely produce balance sheets (because of the expense of a bank reconciliation) anyway.......unless recently requested to provide a balance sheet by a lender !

AND are already not required to FOR TAX purposes or other.

Even I do not understand the application of GAAP to statements I do not prepare !


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By kevinringer
08th Mar 2012 13:32

£30,000 threshold ...

... is a bit misleading because elsewhere they talk about extending AMAP above the current threshold which is the VAT threshold, which is considerably more than £30,000. So we could end up with £30k threshold for simple accounts, £70k for 3 liners, larger threshold again for some aspects of the simplified accounts. All in the name of simplification! At the end of the day this will all be a waste of time if the banks still want detailed accounts. But will they? I recall that when the audit threshold was introduced many people said it would be a waste of time because the banks will still require audited accounts. But the banks were quite happy to go along with it. I wonder what their views are on the current proposals. 

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By johnjenkins
08th Mar 2012 13:54

Sure the banks

went along with it, they had to as audited accounts were no longer produced, but they still want to see the nitty gritty and that won't change. Still as financial institutions aren't giving money for business and mortgages it doesn't really matter. It's about time the BOE took over.

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