The Office of Tax Simplification has today published a document dealing with the taxation of small businesses. It contains a general appreciation that for very small businesses the existing tax rules are over complicated and that they tend to cause problems and costs for the business owner or manager that discourage and penalise entrepreneurial ideas.

The Office recognise that individuals who start up a small business, perhaps because they have a really good idea or as a positive response to unemployment or redundancy, have 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 report suggests that the most promising approach is likely to be to tax profits on the basis of cash accounting rather than on the accrual system. Under cash accounting, the profit for a year is the cash that comes in from customers, minus the cash that goes out to suppliers and staff. Under accruals accounting, which is currently legally required, this figure has to be adjusted for opening and closing stock, debts owed by and to the business at the start and end of the year, and accrued expenses that have not yet been billed.

The report also considers a system of turnover-based taxation, or flat charges. Personally I am not convinced that the UK should be going down this route as in my experience from talking to business owners in countries both of these systems inevitably lead to some businesses being seriously over-charged in relation to profits, and others massively under-charged.

To see the Office of Tax Simplification  report on a simpler income tax system for the smallest businesses, click here


2 Responses to “A Promising Report from the Office of Tax Simplification”

  1. George Arnold says:

    What has been the outcome of this process? Have we got anywahere yet?


  1. A Promising Report from the Office of Tax Simplification « greatbizinfo - April 13, 2012

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