HMRC have launched a consultation 'Simplifying tax for unincorporated businesses', part of the Making Tax Digital (MTD) package of consultations.
The consultation contains a number of proposals intended to reduce administrative burdens and introduce more flexibility ahead of the move to a more frequent reporting framework.
It explores four distinct areas:
1. Extending the cash basis
- The proposal is to give more businesses access to the cash basis by increasing the entry threshold.
- A range of potential thresholds are given, from £100,000 to £166,000.
- The exit threshold and modified threshold for Universal Credit claimants would continue to be set at twice the entry threshold.
2. Reforming basis periods
- The proposal is to get rid of the existing basis system for sole traders (but not partners and partnerships) and eliminate the need for overlap periods.
- HMRC’s preferred option is to allow businesses to set their own accounting periods, which could be as short as required to fit their circumstances and reporting requirements. The maximum length of accounting periods would be 12 months.
- Relief for any existing overlap profits would still only be given on cessation.
3. Simplifying reporting requirements
- The proposal is to offer small businesses liable to income tax (but not corporation tax) reduced reporting requirements for tax.
- This would be achieved by introducing an optional reduced version of GAAP with fewer adjustments.
- Four potential areas for simplification are identified:
- Closing stock: no need to value stock at the period end.
- Contracts spanning a period end: no need to make an adjustment if less than one year long.
- Bad debt provisions: no need to assess recoverability, just write off debts when recovery has failed.
- Prepayments and accruals: only recognise expenses and income invoiced in the period provided timing impact less than one year.
4. Re-examining the capital/revenue divide within the cash basis
- The proposal is that businesses using the cash basis will no longer need to decide whether or not assets are capital items.
- The current general disallowance for capital expenditure will be replaced by a more limited exclusion for the following:
- Land and property
- Intangible assets (except those with a fixed life of 20 years or less)
- Another business (including goodwill)
- Financial instruments
- Cars
- Any other assets with a useful life of 20 years or more.
The consultation will run until 7 November 2016. An announcement on next steps will then be made in the Autumn Statement, together with draft legislation for inclusion in Finance Bill 2017.
Summary of consultation questions: Simplifying tax for unincorporated businesses
These are set out for each chapter:
Chapter 2: Increasing the trading cash basis entry threshold
Q.1.
a) What level do you consider to be an appropriate turnover entry threshold?
b) For a threshold not linked to the VAT threshold, should it be reviewed annually in the light of inflation or less frequently (please state recommended interval)?
Q.2.
a) If the entry threshold were to be increased, do you agree that the exit threshold should continue to be set at twice the entry threshold?
b) If the entry threshold were to be increased, do you agree that the UC threshold should continue to be set at twice the entry threshold?
Chapter 3: Reforming basis periods
Q.3 Do you agree with the proposed approach of following accounting periods? If not, what alternative approach would you support?
Q. 4
a) Are there any other events or situations which would require additional rules?
b) Would it be helpful to make any changes to tax accounting periods for any other types of income?
Chapter 4: Simplified reporting
Q.5.Are there other end of year adjustments not listed in paragraph 4.12 which could be simplified within a reduced reporting framework?
Q.6.Would you welcome the four relaxations proposed?
Q.7.Do you think that the restrictions proposed are appropriate? If not, what restrictions would you suggest?
Chapter 5: Reforming the capital/revenue divide within cash basis
a) Do you believe that simplifying the capital/revenue distinction as suggested in paragraphs 5.7 to 5.13 would simplify reporting for businesses within the cash basis?
b) Can you identify any specific caveats which might be needed to ensure that the new rule operates as intended? Are there any potential tax planning opportunities which the current rules would not prevent?
Chapter 6: Assessment of impacts
Q.10.
a) If the cash basis entry threshold is raised would you consider using the cash basis, or advising your clients or members to use it? If so please provide details of anticipated impacts, including both one-off and ongoing benefits and costs.
b) If the proposed basis period reform is taken forward, how do you think this would impact on business admin burdens? If possible, please provide details of anticipated impacts, including both one-off and ongoing benefits and costs.
c) If the reduced reporting framework is introduced, please provide details of how this will affect your business or your clients or members, including details of both the expected one-off and ongoing benefits and costs for: - Familiarisation with the new scheme and updating software or systems - Having to make fewer adjustments than would be required under UK GAAP
d) If the revenue / capital divide is simplified as suggested do you believe that this would simplify reporting for businesses within the cash basis? If so please provide details of anticipated impacts, including both one-off and ongoing benefits and costs.
e) Please tell us if you think there are any other impacts, benefits or costs not covered above.
How to respond
The deadline for responding to this consultation is 7 November 2016. Responses may be sent electronically to:
Links
Our guide: Accounting: Simpler Income tax (cash basis) / fixed expenses
For our summaries of the other Making Tax Digital documents see: Making Tax Digital: index
Consultation document: Simplifying tax for unincorporated businesses