5 March 2012
On 28 February the Office of Tax Simplification (OTS) issued three papers, forming the final report of its ‘Small business tax review’.
It recommended a number of administrative changes intended to:
- raise awareness among small businesses of the help available from HMRC;
- improve communication and relationships; and
- give businesses more certainty about their tax affairs.
Among the recommendations are:
- two-way email communication with set response times;
- improved VAT rulings; and
- a dedicated HMRC helpline for small businesses.
The OTS proposes that accounts for unincorporated businesses with a turnover under £30,000 should be prepared on a ‘receipts and payments’ basis rather than an accruals basis, with a range of flat-rate deductions to be used instead of actual expenses. Taxpayers would be able to opt for an accruals basis and the use of actual expenses figures where they wished to do so, provided this was done on a consistent basis from year to year.
The report also recommends that a study be undertaken to examine the feasibility of substituting a tax on turnover for a tax on profits in the case of the smallest businesses.
The report identifies a number of tax factors that may discourage small trading companies from ‘disincorporating’, even in cases where other factors would make it preferable for the business to operate in an unincorporated form. These include tax charges on the company when goodwill and some trade assets are transferred to the shareholders, and charges on the shareholders on the disposal of shares. It suggests the introduction of a tax relief enabling disincorporation to be undertaken without incurring a significant tax cost.
The way forward
It is for the government rather than the OTS to decide to what extent these recommendations are taken forward. The government is expected to make a formal response to the report as part of the 2012 Budget on 21 March.