Budget 98 – Cash basis climbdown

Pressure from the accountancy profession has forced Chancellor Gordon Brown to scale down his controversial proposals to withdraw the cash basis for paying tax on partnership profits.

After an outcry from accountancy firms when the proposal was announced just before Christmas, Brown revealed in his Budget on Tuesday 17 March that he will defer the withdrawal for a year – until 1999/2000 – and replace the controversial three-year ‘catch-up’ charge with a 10-year payment scheme capped to 10% of profits.

Experts warned many smaller firms faced bankruptcy unless Brown’s scheme was altered. Tax bills over the three-year period could have reached z100,000.

Mark Lee, BDO Stoy Hayward’s professional practices partner, said: ‘It’s just the move we wanted. It shows the government listened.’

The climbdown was one of a raft of measures launched by Brown to help the UK’s business community. Small and medium-sized enterprises were targeted by Brown, with announcements including:

– exempting SMEs from corporation tax by instalments;

– first-year capital allowances of 40%;

– Inland Revenue help in setting up payroll systems; and

– reform of the capital gains tax regime, including a 10% rate for owner-managers.

Brian Prime, policy head at the Federation of Small Businesses, welcomed the overall package but was disappointed the Chancellor ignored pleas to include sole traders, who often pay 40% tax, in his tax changes.

Prime said: ‘Once again he has widened the gap between the sole trader and incorporated companies. Perhaps the Chancellor considers there are too many minnows and is encouraging sole traders to incorporate, but the costs of the move are still considerable.’

Ian Barlow, KPMG’s head of tax, claimed Brown had clearly taken note of the consultation process. He added: ‘It has been a very good budget for growing businesses, which should reduce their overall tax burden.

The exemption of small and medium-sized businesses from the new quarterly tax payment system and capital gains tax relief are particularly welcome.’

For full Budget News, see Accountancy Age or visit this site on 19 March.

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