OTS proposes dropping GAAP for small businesses

REMOVING GAAP for disincorporated small businesses is one of the options put forward by the Office of Tax Simplification.

The OTS, headed by tax director John Whiting (pictured), published its latest consultation document on taxation for small businesses yesterday. It focused on suitable alternatives for small unincorporated businesses. The document said that a new method was needed to make it easier for these businesses to understand and deal with their tax obligations.

The consultation identified two overarching options: changing the rules to simplify certain areas; and using non-profit measures as a basis of taxation.

Changing the rules could include removing GAAP for small businesses, it said. However, it acknowledged that there is “diversity of opinion”, with some members of the OTS consultative committee “strongly believing” that all businesses should prepare accounts using GAAP and others believing there is a case for a simplified approach for small businesses.

The document suggests that it could be replaced by cash accounting, a fixed rate or amount deduction for certain or total expenses or expenditure on capital to be treated as revenue.

Suggested non-profit measures included using turnover, such as in France, a flat charge “like a TV licence” or indicator-based measures, such as the number of tables in a restaurant or employees in a company.

Alex Henderson, tax partner at PwC, warned that the consultation was “too narrow” in its scope because it principally focuses on sole traders; he added that a move to review all businesses structures would be welcome and that changes would have to deal with the concerns of HMRC.

Henderson said: “Any simplification that occurs could be negated if it is accompanied by reams of anti-avoidance legislation or gives rise to issues that require enquiry by HMRC agents,” he said. “It would be self-defeating to reduce the administrative complexity of the tax system of small businesses only to add to it in other ways, so any changes need to be simple and have broad application.”

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