Pros and cons of ‘simpler income tax for simplest small businesses’

Many businesses in the region will have the option of paying tax based on cash profits, rather than full accounts, under new proposals that could come into effect next year.

But they will need to consider a number of factors in making that decision, according to PKF Accountants & business advisers.

Michael Muskett, Norfolk-based senior partner for PKF, said that some smaller businesses could benefit but others might lose out and it was vital to weigh up the pros and cons.

His advice follow HMRC’s consultation document on ‘Simpler income tax for the simplest small businesses’. It provides more detail on George Osborne’s proposal to allow businesses with a turnover less than £77,000 to pay tax based on cash profits rather than full accounts.

“As things stand, entrepreneurs need to weigh up some of the following points in reaching a decision,” said Mr Muskett.

Pros – Simpler paperwork and less detailed record keeping – In the first year, converting businesses can write-off of 100% of the remaining capital allowance pools -Using an established standard mileage allowance will be simpler – Ongoing asset purchases (apart from vehicles) can be written off as an expense; seemingly with no size limit – Fixed rate expenses for use of home offices will reduce arguments with HMRC over expenses.

Cons – Insisting on the use of 5 April as the year-end date means some people will end up advancing tax payments for the year before they join and they may, therefore, struggle with overlap relief claims – No relief for interest on loans used to support the working capital of the business is allowed. – LLPs and companies are excluded so those using the new basis cannot limit their personal liability – No ‘sideways’ loss relief will be allowed – Businesses will be locked in to claiming standard mileage allowances on cars (rather than CAs) even after they opt out of the scheme.

“Overall, the proposals will probably benefit businesses without large capital assets, such as smaller retailers, consultants, freelancers, domestic service providers etc, and short term roles – for example, those forced to work as a self-employed consultant between jobs,” said Mr Muskett.