Recommendations to simplify UK’s tax system for small businesses
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Recommendations to ease the tax system burdens imposed on small businesses have been put to the Chancellor and published today.
Recommendations to ease the tax system burdens imposed on small businesses have been put to the Chancellor and published today by the Office of Tax Simplification (OTS).
The independent OTS has looked at the problems faced by the UK’s smallest businesses. Today’s recommendations include both technical and administrative simplifications and are made to help the small business sector deal more easily with their tax obligations.
The OTS have focused this review on three key areas: HMRC’s administration; disincorporation; and simplified taxation for the very smallest businesses (those with turnover under £30,000). The key recommendations for each area are:
- Tax Administration - the OTS has found clear scope for changes to be made in the way the tax system is run that will make a genuine difference. There is much that is working well, and HMRC already have a range of initiatives in hand that the OTS endorses, but the OTS has developed a range of practical changes. These will help in areas of raising awareness of the help that is available, improving communication, improving the relationships between HMRC and the small business community and ways to gives businesses more certainty about their tax affairs. Recommendations include the use of two-way email communication, better VAT rulings and information and a dedicated helpline for small businesses.
- Simplified taxation for the smallest businesses - the OTS established that for the very smallest business - often “one man bands” - cash accounts are widely used, whilst claiming for businesses expenses are disproportionately burdensome given the limited amounts often involved. The OTS therefore recommends that receipts and payments accounting is accepted, instead of full ‘GAAP’ accounts. The OTS also recommends a wider range of flat rate expense allowances be available. These methods should be the default option for qualifying businesses, with an “opt-out” allowing those to select the system that is most beneficial to them. Furthermore, the OTS recommends a full study is undertaken of a turnover tax as a possible alternative for the smallest businesses.
- Disincorporation - the OTS identified that a number of the smallest companies would like to ‘disincorporate’ and move to an unincorprated status. The current tax system mitigates against this, so the OTS has proposed the introduction of a tax relief so that companies can disincorporate without incurring significant tax cost. This would parallel the existing incorporation relief. This would have the dual benefit of reducing admin burdens whist facilitating business reorganisations allowing businesses to trade in their correct form.
John Whiting, Tax Director for the Office of Tax Simplification said:
We have spent a lot of time gathering the views of businesses and their advisers about the tax system from the sharp end. That has led us to recommend a range of practical changes to the way the system runs that will help businesses with their everyday tax affairs - and will help HMRC as well.
We have also looked for ways of changing the tax system and that has led us to recommend introducing a disincorporation relief and a wider range of flat rate allowances. There’s a strong case for a form of cash accounting and indeed we think that going further into a radically different way of calculating tax for the smallest businesses needs study. Overall, we think that the recommendations put forward today represent a common sense approach that would help to ease the burdens of thousands of the smallest businesses throughout the UK.
The OTS has gathered evidence through surveys, meetings and roadshows throughout the UK. In all it has had input from around 4,000 small business people, tax advisers, and representative bodies, allowing anybody with an interest to contribute to the review, and give people a platform to air their views on the problems currently faced.
Read the full report on the OTS recommendations on small businesses. The OTS’s interim reports on pensioner taxation and share schemes are due on Tuesday 6th March 2012.
Notes to Editors
The independent Office of Tax Simplification was established on 20 July 2010 to carry out reviews in order to provide expert advice to the Chancellor on options to improve and simplify the UK’s tax system.
The OTS team is led by Chairman Rt Hon Michael Jack, and Tax Director John Whiting and has a staff drawn from HM Treasury, HM Revenue & Customs and secondees from the private sector. Details and biographies are available on the OTS website.
OTS started its work in September 2010 and initially took forward two reviews: tax reliefs and the first stage of small business taxation (which focused on the IR35 review). The reports led to current proposals to abolish a number of reliefs and the ongoing study into combining the operation of income tax and NICs.
The recommendations put forward in the final report on small business taxation flow in part from the responses to the two discussion documents published in July 2011.
The OTS’s next reports will be the interim reports on the review of pensioner taxation and approved share schemes, which are due on Tuesday 6 March 2012.
Thoughts and comments on the OTS small business review can be sent to: firstname.lastname@example.org
Issued by Office of Tax Simplification Press Office
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OTS Press Officer
Phone: 020 7147 0051 / 07917 598392