Cash accounting too complex

The Chartered Institute of Taxation (CIOT) has warned that a government proposal designed to simplify tax and accounting for small businesses is ‘doomed to fail’, reports small business accountants Harris & Co.

CIOT’s comments come in response to draft legislation on Simpler Income Tax for the Smallest Businesses, including cash accounting, published for consultation ahead of its inclusion in Finance Bill 2013.

While the institute backs plans to introduce cash accounting - as proposed by the Office of Tax Simplification (OTS) in 2012 - CIOT says HMRC has coupled this with what it calls ‘a number of unpalatable conditions.’

The tax institute says that some of these - such as the withdrawal of the ability to claim certain business expenses and reliefs - have resulted in a ‘complex and unattractive’ package and it wants the government to re-consider the proposals in order to make them more simple and workable.

Andrew Gotch, chairman of the CIOT’s owner managed business technical sub-committee, said:

‘The proposals will effectively require advisers and provoke taxpayers to prepare accounts on both an accruals and a cash basis every year in order to decide which is “best” from a tax perspective. Thus the legislation builds in exactly the kind of tax-driven avoidance that HMRC and Government should be actively discouraging.’

‘It is also precisely the opposite of the OTS’s aim: to have a simple system that is the obvious way to go for the smallest businesses and which can be managed without extensive professional advice. HMRC’s proposal is bad policy and bad law.’