Sole Survivor: Cash accounting - the hidden burden

I AM ALL IN FAVOUR of making tax simpler – especially for small businesses.

So when the March 2012 Budget brought about a proposed new system for small businesses I thought “cash accounting – bring it on”.

That was until I read the “Simpler Income Tax for the Simplest Small Businesses” consultation document. As always the devil is in the detail but with some detail sadly lacking in the paper more devils could emerge later. For now there are a couple of details that do give me serious cause for concern.

How much extra tax to ease the admin burden?

This scheme needs to be very carefully positioned, advertised and explained by HMRC as being one of easing the administration burden as a result of which the qualifying business owner may or may not pay more tax.

It is certainly not the case that operating the cash accounting scheme will always mean that the micro business plays less tax. For example, will taxi drivers pay less tax using cash accounting which means that they have to use the flat rate business mileage as well?

In the HMRC ‘Your Charter’ (being the taxpayers’ charter) it is said that HMRC will act with integrity.

Integrity must extend to the implementation of this scheme through education, tools and calculators explaining who would be better off and who would be worse off by operating this scheme.

Would it be moral, ethical or honest of HMRC to encourage a micro business to use simplified rules knowing that such rules could mean more tax being collected from that small business?

I think HMRC will struggle to give a simple yes or no on whether a business owner will pay more tax under the new scheme than before and actually it will mean that every year a business needs to undertake a comparison of their tax position under the new and the existing rules.

It begs the question – if you have to do a comparison then is it a simplification?

And what of the trusted advisor being asked to give an opinion whether a business should join the Cash Accounting scheme or not? A simple yes or no is never going to do and it is certainly not a one size fits all situation.

All business advice sites will need to be clear about the circumstances in which a business may find the scheme of benefit.

An appointed accountant will need to prepare accounts to both methods to ensure that the client has been correctly advised on the most appropriate scheme. Could this lead to smaller businesses being charged higher fees? Now that would defeat the objective!

Whilst the final execution of the accounts under the cash accounting scheme may be simple, arriving at the decision to adopt the scheme will not be!

Worse still, trying to explain this to the small business owner will surely lead to more complexity and confusion.

By trying to simplify small business accounting and introducing a choice, have HMRC just introduced more complexity?

I’m off to reply to the consultation and wait with baited breath for the implementation.

Elaine Clark is a chartered accountant and MD of accountancy practice cheapaccounting.co.uk. She will be blogging on the issues facing smaller practices and their clients