Don't get carried away with cash accounting

ACCOUNTANTS HAVE RESPONDED cautiously to the chancellor's proposed introduction of cash accounting for small unincorporated businesses to help them with their tax bills.

The chancellor announced in the Budget that from April 2013 a new cash basis for calculating tax for small unincorporated businesses would be introduced. The government will consult on the details of the scheme including extending eligibility to businesses with a turnover up to the increased VAT registration threshold of £77,000 - currently the threshold is £73,000 but it likely to increase in October.

The government says this measure will benefit up to three million small businesses, reducing the time it takes for them to calculate their tax.

However Elaine Clark, managing director of CheapAccounting.co.uk, says ‘the devil will be in the detail' on whether this will turn out to be a true simplification as promised, or not.

"Before we can see whether this measure will turn out to be a simplification of small business taxation, we need to see how it is going to work," Clark says.

"A lot of businesses already operate the cash basis for their tax calculations, but you cannot apply the cash basis to all types of business. Cash accounting for VAT does not always work for year-end accounts."

Clark also questioned why the VAT registration turnover threshold of £77,000 had been chosen, rather than the higher-rate tax threshold of £42,475. Meanwhile, Chas Roy-Chowdhury, head of taxation at ACCA, says that the introduction of a cash accounting basis for small businesses is "a good thing", but the government must be careful how the measure is implemented.

"It could work well for businesses with turnover up to the VAT threshold of £77,000, as most businesses won't have employees up to that level," Roy-Chowdhury says.

However, he warns there could be greater scope for tax evasion if the government, as has been suggested, pushes the business turnover threshold for the cash accounting basis up to £150,000 - especially as businesses at this level have employees whose PAYE and NI needs to be accounted for properly.

It could also go the other way, with small businesses paying too much in tax - will moving to a cash basis really help them stay liquid and solvent?

"The other issue is that when these businesses apply for bank loans they will need accounts prepared by accountants on the accruals basis," says Roy-Chowdhury.

"I don't think the cash basis would do away with small businesses' need for accountants - like the introduction of the audit exemption for small companies, all that has happened is that accountants evolved into a more business advisory role to their clients. But it could create messy records that accountants need to spend a lot of time sorting out when the business eventually moves from accounting on a cash basis to an accruals basis."

Elaine Clark adds that she would like to see the forthcoming consultation gather responses from the very businesses it aims to help.

"The consultation must engage with people who are operating at that business level and their accountants, rather than gathering responses from large accountancy firms who do not deal with small unincorporated businesses," she says.