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OTS looks to a simplified small business tax system

The Office of Tax Simplification (OTS), the independent body set up by the Government to streamline business tax, has put forward two new proposals to help smaller firms cope with their taxation obligations.

The first focuses on disincorporation for small companies, the other on a simplified income tax system for sole traders.

In the past, a large number of small traders incorporated in order to achieve better tax arrangements. However, many small companies are now struggling with the administrative demands of incorporation. One possibility is to offer small companies the chance to revert to self-employment without facing too great a capital gains tax charge.

The second consultation document looks at the way that small firms calculate their profits.

It suggests consideration of a cash accounting system whereby a year’s profit is measured by the money collected from customers minus the cash that is spent on wages and supplier costs. The present system, which is called accruals accounting, demands that other calculations, such as opening and closing stock, debts owed to and by the business, an accrued expenses still to be billed, be taken into account.

Another alternative system could include flat rate charges,

John Whiting, tax director of the OTS, said: “We have been told in no uncertain terms that tax administration can be a problem for small businesses. So we want to stimulate debate and allow those in business, and their advisers, to give us their views on the various possible ways forward.  

“Would a cash basis be a better way of taxing the smallest businesses? How about flat rate expense allowances? What of the more radical alternatives some other countries use – could any of them work here? Do we need a disincorporation relief?”

The consultation documents, the OTS said, are not firm recommendations but are intended to generate debate ahead of final proposals which will be submitted to the Treasury before the 2012 Budget. The consultations run until 7 October.

The documents, on which the OTS would like to hear a diversity of views, can be found at: http://www.hm-treasury.gov.uk/d/ots_disincorporation_of_small_companies_discussion_paper.pdf and http://www.hm-treasury.gov.uk/d/ots_tax_for_small_business_discussion_paper.pdf

Richard Baron, Head of Taxation at the Institute of Directors, said: “This is a sensible survey of the options for resolving a serious issue. The individual who starts up a small business, perhaps because they have a really good idea or as a positive response to unemployment, has more important things to worry about than the technicalities of the tax system. The start-up phase of a business demands concentrated hard work. Distractions like tax rules reduce the chances of success.

“The most promising approach is likely to be to permit cash accounting, so that profits can be worked out directly from business bank accounts. A lot of small businesses probably do this anyway, and the Revenue just don’t notice.

“Turnover-based taxation, or flat charges, would be of very doubtful value. Some businesses would be seriously over-charged in relation to profits, and others under-charged. These methods are used in other countries, so it is right to debate them. But we don’t want anyone in government running away with this idea before real business people have made their views known.”