3 Million small firms see radical tax simplication

The majority of businesses face a significant simplification of their tax affairs under plans to allow them to account on a cash basis. Firms with sales of up to £150,000 a year - estimated at more than 3m firms - could be allowed to shift their accounting from the traditional accrual method to a cash basis, simply paying tax on the amount of cash collected minus their acceptable operating expenses. The Budget will launch a consultation on the proposal but if no serious concerns are raised the Treasury has said it wants to introduce the cash accounting proposal for firms trading up to the VAT threshold in April 2013. It will then consider raising the threshold to £150,000. The decision is based on a recommendation from the Office of Tax Simplification, which argued that two million firms generating less than £30,000 would benefit from the reform. Chas Roy-Chowdhury, head of taxation at the accountants body, the ACCA, said the more ambitious threshold would be welcomed by businesses but could have unintended consequences. "It is very good news for businessses, but we need to be careful that we don't cause problems with the integrity of the tax system," he said. "Some firms with £150,000 are likely to have employees, with tax to pay and VAT. We have to make sure we don't cause problems with tax evasion." The proposal appears in a package of measures for small businesses from HM Revenue & Customs, aimed at improving the way the tax system treats small firms. It includes a consultation on proposals to create a tax relief to allow small company owners to disincorporate - a move championed by the OTS. Many self employed people incorporated in the mid 2000s to take advantage of tax breaks, which were subsequently withdrawn by the last government.