A few weeks ago I had quite a heated debate with Richard Murphy on the issue of cash accounting for small businesses. As he opposed that idea, I – and others – asked him to put forward an alternative solution, as the one point we all agreed upon was that the tax regime for small businesses is in dire need of simplification.
Further to a posting by Mike Truman on the Taxation website
Richard has responded and his article can be found here
In summary, Mike and Richard suggest that micro businesses (with a turnover under the VAT registration limit and not registered for VAT) could have the option to work out their taxable profit by:
1) Adding up the sales for the year, figure x
2) Taking a fixed percentage of sales according to what trade sector the business operates in, figure y
3) x – y = taxable profit.
This to me has advantages over cash accounting. It is less open to manipulation and teeming and lading, would be simpler for HMRC to work with since they would set the trade sector percentages, and would be very easy to work out, with far fewer ifs and buts. Also there would be no transitional arrangements since a business could easily use the simple method one year, and switch to preparing full accounts for the next – similar to when a business has to stop using the VAT flat rate scheme.
This simple method wouldn't suit all micro businesses, but for those which don't want to grow and expand but just want to tick along quietly and earn enough to run the home, and/or one man bands selling their services (interior designer, party organiser, web site designer, plumber, taxi driver, etc), I can see serious advantages.
I would though, recommend a safeguard be put in place to ensure that businesses still keep records of sales invoices, purchase invoices, cash received and spent (as in the Winweb cashbook), so that they keep track of potentially late- or non-paying customers, and make sure they have enough cash to pay bills.