Introduction »

A simple solution?

Given that there are approximately three million unincorporated businesses in the UK that have a turnover of £70,000 or less, including approximately two million with a turnover of £20,000 or less, it is not surprising that a review of small business tax is on the agenda for debate. Following an initial report on small business tax earlier this year, the Office of Tax Simplification (OTS) is now working on the next stage of the process, with a view to preparing a further report with recommendations ahead of Budget 2012. There are currently three strands to this further work.

The tax administration experience

The first strand of the project is to examine small businesses’ experience of tax administration and their contact with HMRC at key stages of the annual tax cycle. It will also look at the tax administration processes involved in starting and growing a new business.

John Whiting, Tax Director for the Office of Tax Simplification said:

‘A clear message from the first stage of our small business project was that a big area of difficulty for small businesses was the administration that surrounds the tax system. I’m delighted that the Chancellor has endorsed our report and asked us to take it forward to the next stage.'

'It’s clear that many small businesses are struggling under the administrative burdens imposed by the UK tax system. We plan to set up surveys and more roadshows to really home in on what steps cause the most difficulties – and how the system can be improved, making it easier for businesses to get things right with the minimum of fuss.’

Taxing the small business

The second strand of the project is concerned with looking at alternative methods of taxation for small unincorporated businesses. Options fall into two broad categories:

• the retention of profit as a measure upon which the tax charge is based but allowing a simpler approach to the calculation of those profits, or
• using non-profit measures as the basis for taxation.

A simpler approach to calculating profit

This option is about exploring the alternatives to generally accepted accounting practice, commonly known as GAAP. GAAP requires accounting adjustments such as prepayments, accruals and work in progress. Such matters are not readily understood by the smallest businesses. Instead these businesses could prepare accounts and tax returns on a cash receipts and payments basis.

Another option suggested is to explore the use of fixed deductions either by way of a rate (%) or fixed amount (£) for certain expenses which could reduce the amount of work required to produce both the accounts and hence the taxable profits. Such a method could also provide more certainty as to tax allowable expenses.

A further option suggested is to consider allowing small items of capital expenditure, say up to £200 per item, as an allowable revenue expense. Currently, items of capital expenditure, however small, are dealt with under the capital allowances legislation.

Options for non-profit based measures

A more radical approach to the taxation of the small business could be to use a non-profit related measure. Each of the options to be explored are already used in various other countries. These options include basing the tax charge on:

• Turnover, such as using adjusted turnover for example, by removing employment related expenditure and using a previous year’s profit figure uprated by a specified amount.
• A flat charge on the business, where there is a single fixed tax charge for being in business.
• Indicator-based measures where, for example, the tax charge is fixed by reference to the number of tables in a restaurant or the number of employees.

Clearly, further research would be needed to understand how these measures work in other countries and how successful they are in simplifying taxation for the smallest businesses before any decisions were made in respect to UK businesses.

And the third strand… disincorporation

The third strand examines the possibility of introducing a relief for businesses that no longer want, or need, to be carried on in a corporate structure and for which it would be administratively more straightforward if, for instance, they were able to convert to a sole trader or partnership structure.

Reliefs apply to individuals when incorporating their businesses, for example, no charge to capital gains tax need arise on the transfer of assets into the company, but there are currently no similar reliefs on disincorporation.

There are no actual proposals for a disincorporation relief at this stage. The aim of the discussion paper is to present some provisional options in enough detail to help people gauge whether there is a demand for such a relief and whether it would deliver overall simplification for the small business.

We will keep you informed of any future tangible developments in this area but please do contact us if you wish to discuss any of these areas.

Introduction »