Press Release: Cash accounting: Opportunity missed to help smallest businesses

The Chartered Institute of Taxation (CIOT) thinks HM Revenue & Customs (HMRC) should revert to the drawing board over proposals for introducing a cash basis for income tax. ¹

The CIOT backs the introduction of cash accounting for the smallest businesses as suggested by the Office of Tax Simplification (OTS). However, HMRC have coupled the proposed cash basis with a number of unpalatable conditions, such as the withdrawal of the ability to claim certain business expenses, making the package unattractive. This seems to be linked to the much-increased (compared with the OTS recommendation) size limit for the scheme, which has led to HMRC concerns about tax leakage.

Andrew Gotch, Chairman of the CIOT’s Owner Managed Business Sub-Committee, commented:“HMRC’s version of the cash basis is not really a cash basis at all, but a means of arriving at an estimate of a person’s income from a business by a less formal means than that of preparing GAAP² accounts to produce a profit or loss. That seems wrong.

“A system of cash accounting, as envisaged by the OTS, enacted for use by the smallest and simplest businesses, would reduce burdens and compliance costs for those businesses. But it should be truly simple in a way that businesspeople can understand – which HMRC’s proposals are not.

“Preventing loss making businesses from claiming sideways loss relief is not equitable and is based on a false premise.

“The proposal for improved and wider flat-rate allowances has been linked to the cash basis with uneconomic rates of allowances. This adds complexity and fails to achieve what could otherwise have been a welcome simplification: it will increase the need for advice. HMRC’s proposals to abolish some existing allowances for agricultural and other industries would be a significant burden.

“It is time for HMRC to embrace the true meaning of simplification and give the smallest businesses relief from tax administrative burdens.”

Notes to editors

1. The CIOT’s views are set out in the Institute’s response to HMRC’s consultation document ‘Simpler Income Tax for the Simplest Small Businesses’. The consultation document, and full text of the CIOT response, are available at: http://tinyurl.com/7qqcejm

2. GAAP stands for Generally Accepted Accounting Principles, the standard framework of guidelines for financial accounting used in the UK.

Technical Team

28 June 2012