TaxPersonal TaxNo substitute for fresh start

No substitute for fresh start

The technical note A Review of Small Business Taxation, recently published by the Inland Revenue, seeks to simplify the reporting requirements for smaller companies.

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.

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