The recent budget (see Wallace and Gromit's Budget) brought news of tax "simplification" for the two million small businesses. But can we manage a "Hurrah"? Well, probably not. There are, as you might expect, one or two details that give pause for thought.
Firstly, no-one knows better than HMRC whether moving to a cash basis will collect more tax, or less tax. Do you seriously think they would want to move to a system that collects less tax. Well, maybe. But what cash accounting means is complex. For example, do taxi drivers who use cash accounting have to use the flat rate business mileage rules, or not?
Secondly, even if you have certainty over what the rules mean you don't always know how the numbers are going to turn out. Giving businesses the choice - you can adopt cash accounting or you can carry on with the accruals basis - creates its own problem. Yes, crunching the numbers is simpler (and probably cheaper). But don't ask me if it means you will pay less tax - because all I can do is suggest that we do two sets of accounts and then choose which to use. Simpler accounts but a much more complex decision on which to use.
There is another kite being flown, although it seems unlikely that it will come home to roost - if that isn't mixing too many metaphors. Do you fancy paying a turnover tax instead of a profits tax? For those of us who thought we already had a turnover tax (VAT) this was something of a surprise. So do you "simplify" VAT by raising the threshold and all the microbusinesses then suffer VAT as a cost and pay more that way? That won't work, as they charge more VAT than they pay. So you are having an additional income tax levied at a flat rate on turnover - irrespective of the profitability of the business? Or do you have different tax rates for different trade sections (like the VAT flat rate scheme just now). That would be a simplification, however it was done. But who knows where the rates would be fixed and do you really want to risk being one of the losers?
One size fits all? Here at CS Corporate Solutions we are not really looking forward to having to try to explain tax simplication to our clients. Confucius he say "Life is really simple, but we insist on making it complicated."