Tax Matters: Chris Annis examines proposals for reporting by unincorporated businesses

Chris Annis, a director at LB Group

Chris Annis, a director at LB Group - Credit: Archant

THE Office of Tax Simplification (OTS) has done much to remove outdated legislation for small unincorporated businesses since its introduction in the summer of 2010.

Its latest attempt to reduce the red tape burden has seen them recommend the introduction of a voluntary “cash basis” reporting facility, together with a simplified expenses regime for small businesses, from April 2013.

Whilst the current recommendation is a proposal only, the following are the main characteristics of what is likely to be ultimately introduced.

The proposed cash basis means that small businesses can elect to be taxed on the basis of the cash that passes through their books, rather than on the current ‘accruals’ basis.

This negates the need for the business to spend time calculating debtors, creditors and stock. A further ‘simplification’ will be that capital and revenue expenditure will not need to be separated and capital allowance calculations will no longer be necessary.

Generally, the new rules will apply to self-employed sole traders and partnerships.

To begin using the cash basis, turnover must not exceed the current VAT registration limit. Once you are in the regime you can stay in until your turnover reaches double these amounts.

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Expenses – For those using the cash basis, the use of flat rate expenses for cars will be compulsory i.e. you will have to claim the pence per mile rate (currently 45ppm for the first 10,000 miles and 25ppm thereafter) rather than the actual costs and cash basis accounts still need to be adjusted for tax purposes, e.g. any entertaining expenses must be disallowed.

As you would expect there are reasonably complex rules in order to deal with the transition from an “accruals” to a “cash” basis, mainly to prevent businesses from obtaining an unfair tax advantage.

So is it simpler?

For many businesses it will mean extra calculations to decide whether they should change and one consideration here is that if you choose the cash basis the way that any losses are relieved is restricted.

If you use the accruals basis and make a “taxable” loss (perhaps due to the purchase of a large piece of kit) then you can set this loss against other income in the year.

However, if you use the cash basis then the only thing that you can do with that loss is carry it forward, making the cash basis particularly unattractive to a business in this situation.

As stated, the above rules are still ‘proposed’ and further details will be announced in the forthcoming budget.

: : Chris Annis is a director of the LB Group. Please note the above does not constitute financial advice and LB Group cannot be held responsible for any errors or omissions. If you need help or advice on any of the above topics please contact LB Group on 01473 359720 or email .

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