The Office of Tax Simplification (OTS) has published two discussion papers on small business taxation as part of its ongoing review process. 

"A simpler income tax for the smallest businesses: a discussion paper", looks at how income tax may be simplified for the smallest business.

A simpler income tax for the smallest businesses

A small business is as yet to be defined by the OTS, there are some 3.5 million unincorporated businesses in the UK, and about 900,000 have a turnover under £20,000. The criteria for a new simplified tax system could be decided by an annual turnover threshold, it is considering:

  • £20,000
  • £30,000
  • The VAT registration threshold

The starting point is that the current system is too complicated and most small business owners do not understand the requirements of Generally Accepted Accounting Practice (GAAP). 

The following alternatives are up for discussion:

  • Cash accounting
  • Fixed rate or a fixed deductions for certain expenses
  • Fixed rate or fixed deductions for all expenses
  • Allowing small expenditure on capital items to be treated as revenue.
  • Using non-profit measures as the basis for taxation.

The OTS asks:

1. What part of preparing accounts takes the longest, and what would simplify this process?

2. Do you currently prepare accounts using GAAP?

3. Do you use the following and why:

  • Fixed rate mileage allowances
  • Estimates for certain expenses
  • The VAT flat rate scheme

4. Would you prefer to use flat rate deductions? What advantages and disadvantages can you see?

5. Would a flat rate make it easier when calculating what proportion of an expense relates to business?

6. Would simplification save any costs, after considering the cost of transition and other complexities?

The paper also includes a review of the regimes of other jurisdictions around the world (fascinating reading, if you have the time). 

Responses by 7 October 2011

A second paper, Disincorporation of small companies discusses a new disincorporation relief.

Links: OTS Small Business Tax Review

 

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