"Simpler Income Tax for the Simplest Small Business" is to be introduced from April 2013 following consultation.
History
The Office of Tax Simplification (OTS) looked for ways of simplifying tax and accounting for small business. After the release of a discussion paper in the Autumn 2011 HMRC took its proposals and changed them.
The proposals are for:
- Voluntary cash accounting
- Flat rate expenses
These measures would apply from 5 April 2013.
Turnover limits
The OTS proposed simplified accounts for small businesses with receipts up to £30,000. The Government raised the limit to the VAT threshold or double for Universal Credits claimants, with disqualification once turnover exceeds £158,000 (or double the VAT registration limit).
Eligibility
Businesses ineligible to use cash accounting:
- Limited companies
- a LLP with a corporate partner
- Businesses using averaging or the herd basis (authors and farmers)
- Lloyds underwriters
The mechanics
Businesses would account according to the tax year – 6 April to 5 April.
Getting started:
- New business: either simplified tax accounting is default or businesss opt in
- Existing businesses – need to opt in.
Cash accounting
This is planned to be on a similar footing as VAT cash accounting.
What will be classed as income:
- All receipts
- Value of good and services in kind
- Items taken for own consumption
- Sale proceeds
- The value of an asset switched into part private use
- VAT refunds
Receipts not classed as income:
- Funds introduced personally or by bank loan
- Proceeds of dutiable assets such as land and propety
Allowable expenses:
- Expenses wholly and exclusively incurred
- Including capital expenditure
- Vehicles: a deduction for the cost of vans unless mileage allowances claimed instread
- No deduction for expenditure on cars and motorcycles as mileage allowances claimed
- Capital expenditure restricted for private use
- VAT paid to HMRC
Unallowable expenses:
- Entertaining and bribes
- Capital expenditure in investment assets
- Non cash costs such as depreciation
- Costs of finance other than inerest/charges on stock or plant and machinery.
Negative results: carry forward
- No sideways “loss” relief
Starting and leaving
Special rules would apply presumably to prevent duplication
Simplified expenses
The consultation considers optional use of:
- A standard mileage rate for business use of cars and motorcycles
- Flat rate expenses for business use of home
- Flat rate adjustment for personal use business premises (mixed use premises like guest houses or pubs where the owner lives on the premises)
- Full deduction for costs such as telephone where private use is insignificant
- Deduction for subsistence: HMRC to review and update current guidance to provide more certainty
- Deduction for stationery: use of an alternative method of apportioning costs e.g – per letter
Matters for consultation are whether there should be up to a 3-tier band flat rate or a simpler single fixed rate.
Links:
Consultation: Simpler Income Tax for Smaller Business
