Its tone is somewhat impatient. This is because in the Budget the chancellor said he wanted to reduce the administrative burden on smaller companies by making published financial statements the basis for tax computation.
The government would like to cut out the intermediate step which requires small businesses to prepare financial statements which are then subject to tax adjustments. It argues that accounting profits should be the same as the taxable profits.
Here lies the rub. There is a clear misunderstanding; the financial statement is seeking to help the small business understand the bigger picture – such businesses do not have the luxury of regular management reports and so use these statements to gauge their financial health.
The Revenue has been expressing the view that it would like to see greater conformity being brought into the preparation of financial statements.
It does not like the idea we accountants are able to ‘take a view’.
We have had meetings with the Revenue where we have heard comment equating ‘taking a view’ with the lack of reliability of some accounts. I can see a time where in a reverse of the present situation, accounts are prepared in accordance with ‘tax rules’ and then adjusted to give a fair view.
The point is whether the Revenue and the government will allow the sweeping away of their sacred tax cows. Will businesses be entitled to deduct all business expenses or will there be caveats for items such as entertaining and franchise agreements?
If the government agrees that small businesses may take the accounts depreciation for tax purposes, it is short-changing the businesses by denying these 100% allowances which are available. Also, how will the government influence business behaviour if it dispenses with its ability to use the tax system to promote its favoured areas?
Under the new regime it will have to adopt a more ‘hands off’ approach.
The possible creation of three sets of business tax rules will be breathtaking in the complexity which will be created and the inherent difficulties for those in the ‘interface zones’.
At the end of the day what is required is not a quick fix but a simplification of the entire tax system.
– Chas Roy-Chowdhury is head of taxation at ACCA. Difficult issues must be debated
Amid the Budget Day press releases was a potentially highly radical proposal to review the taxation of small businesses.
Driven by an apparent desire to reduce regulatory and compliance costs, it can only be applauded that such an issue has been put forward for consultation and that an attempt is being made to consider some very pressing and difficult issues.
At the ICAEW’s tax faculty we have been campaigning hard for many years for tax simplification. Our Towards a Better Tax System project has highlighted how complex the system has become and its particularly burdensome effects on small and medium-sized enterprises.
Positive steps to ease excessive burdens on business can only be welcomed and we look forward to discussing the proposals with the Inland Revenue.
That is not to say that the path to real simplification and workable solutions will be easy. One suggestion in the consultation document is that specifically defined small businesses should have their taxable profits aligned with their accounting profit.
On the face of it this could be very helpful if this involved finding a sensible way of dealing with the adjustments that are currently necessary between the two sets of accounts.
The question here is how will this be put into operation? The profits shown in the accounts are just the starting point for the taxable profits, which currently have to take into account such disallowable items as entertaining and legal expenses, and cope with adjustments between depreciation and capital allowances.
It is how such issues are dealt with that will be crucial to the proposal’s success but we welcome the chance to debate these issues and seek alternative ideas.
Other elements of the paper require particularly careful consideration.
For example, there is a suggestion the Revenue would like to become more involved in setting accounting standards if the accounting profit is to be paramount.
Accounts do not pretend to be perfect but are intended to give a true and fair view, hence the use of a materiality test.
This is unlikely to sit easily with the Revenue’s normal methods of workings and there would be a concern if any change led to increased costs or even increased enquiries that might wipe out any potential cost savings from the proposal.
– Francesca Lagerberg is the senior technical manager in the tax faculty of the ICAEW.
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