Red tape warning over HMRC plans to simplify tax for SMEs

Government proposals to make corporation tax for small business simpler could create new red tape, increase IT costs and make company accounts harder to compare, experts have warned.

Currently, small businesses have to file two sets of accounts ­ statutory accounts to HM Revenue & Customs and the Treasury, which use the accounts to calculate the company’s corporation tax bill, and an abbreviated version of their accounts to Companies House.

The dual reporting system has been criticised for being confusing and time-consuming.

An HMRC ‘discussion paper’ on simplifying corporation tax, which closed last week, suggests allowing small businesses to move from traditional ‘accrual-based’ accounting to a ‘cash-based’ accounting rule based more closely on cashflow.

It has also suggested allowing small companies to base their statutory accounts on tax rules rather than ‘generally accepted accounting principles’.

The proposals, which would affect companies with a turnover of less than £750,000 and fewer than 10 employees, could come into force in 2012. HMRC has yet to decide whether the changes should be compulsory or optional.

Plans to simplify corporation tax have been broadly welcomed, but accountants IT experts and a small business group have warned that some of the proposed changes could make things worse for small business.

The Chartered Institute of Taxation said the review was a missed opportunity because the government was only considering changing corporation tax rules for limited companies and not sole traders.

‘Our strong opinion is that limiting the review in this way is a wasted opportunity,’ the CIoT, said last week. ‘Meaningful simplification in this area can only be achieved if consideration is given to the taxation of all small businesses.’

Francesca Lagerberg, head of national tax at Grant Thornton, welcomed the aims of the corporation tax review, but cautioned: ‘Small business will not want massive change and uncertainty at this time. Any change [to small business corporation tax rules] would have to involve minimal change and be incredibly easy to introduce.’

A spokeswoman for the Federation of Small Businesses, which represents more than 215,000 small businesses, also said it was concerned about a possible increase in compliance costs for its members if corporate tax rules were changed.

Others have raised concerns about IT costs. Changes to corporation tax rules would require IT suppliers to develop new software to accommodate the changes. This would increase small businesses’ IT costs.

Dennis Keeling, a business software analyst and former chief executive of the Business Application Software Developers’ Association, said the consultation proposals would require small businesses to upgrade or replace their book-keeping computer systems.

In April 2011 online filing of corporation tax returns is due to become mandatory.

The Institute of Chartered Accountants of Scotland said the government should abandon its ideas for altering small company accounting and tax rules and instead try to simplify tax compliance for all small businesses.

In its discussion document published last November, HMRC said respondents had agreed on the need to simplify the corporation tax system for small business although there was no consensus on how the rules should be changed.

HMRC said it would weigh the potential benefits of tax simplification against the cost and burden to small business of complying with the new rules.