Cash basis and fixed rate expense deductions

by Tax Faculty Team on 11.02.2013 18:34

Alternative tax system for small business is not a simplified system

Unfortunately, having now seen the first attempt at legislation, we do not think these proposals can be made ready for implementation from 6 April 2013. This should be delayed for a year if at all possible to allow more time for proper considered thought to be given to the legislation. Moreover, HMRC’s guidance is being written concurrently with the design of the system, commercial software is not yet available let alone tested, and most potential users of this system, the small businesses themselves, remain totally unaware of its existence.

We have been told that this will be an iterative process which will be improved through practical experience. While we welcome this open approach and ready acceptance to make necessary improvements going forward, we do not consider this to be the way to implement radical change to the tax system which it is estimated could affect 3m businesses in the UK.

We are increasingly concerned that this will not be the simplified system proposed by the Office of Tax Simplification, but rather will just be an alternative system. For our comments on the cash basis draft legislation see TAXREP 16/13.

Following discussions with HMRC and mindful of the likelihood that this legislation will proceed with only minor changes from 6 April 2013, we suggest the following matters could still realistically be addressed at this stage:

  1. The proposals for the cash basis as currently drafted are not suitable for partnerships. These should be excluded until the problems have been resolved.
  2. The easiest and most pragmatic solution to small quantities of goods being taken for a proprietor’s own use, would be to disapply the ‘Sharkey v Wernher’ legislation, s 172B, ITTOIA 2005.
  3. Sideways loss relief, capped at £50,000, should be allowed.
  4. The ability to move between the cash and accruals basis each year makes the system more complicated than it needs to be and means that anti avoidance legislation is needed. We have heard HMRC’s concerns about this complexity and have had meetings to discuss the issue. We have suggested restricting an individual’s choice to move between cash and accruals accounting to once every five years, unless the business exceeds the income limit or unless there are other commercial reasons to change. This rule follows the existing rule restricting a change of accounting date, s217(4), ITTOIA 2005.

We are broadly supportive of the proposals to allow a system of fixed rate deductions, see TAXREP 17/13, but consider that:

  1. The amounts specified for deductions are too low.
  2. There should be only one rate for using a private car for business, being 45 pence a mile. This could more easily aligned with the Universal Credit rules which are based on monthly rather than annual usage.
  3. The requirement to keep a record of hours spent using a home for business purposes represents an additional administrative burden, which cuts across the purpose of this proposal.

Experience shows that complex legislation leads to anomalies and requires complex anti avoidance provisions as it attempts to cover all possible situations. It also leads to a greater need for extensive guidance, which users rely on rather than the law itself.

Overall, this draft legislation is impenetrable. While the Tax Law Rewrite Style is no longer being used, it is odd that such complex drafting has been used to define what was to have been a simpler tax system for small businesses.