A Review Of Small Business Taxation
The Inland Revenue's note on "A Review Of Small Business Taxation", is available from the Inland Revenues website at www.inlandrevenue.gov.uk
Comments from the Association of Chartered Certified
Accountants
April 2001
2 What is a Small Business?
2.1 We consider it sensible to use the Companies Act limits for definition purposes.
2.2 We also accept the same definition should be applied to groups.
3 The Current Rules
Noted.
4 Moving Towards Accounts Profits For Tax
4.1-4.2 It is important to ensure that any new system allows companies to take a "greater of" deduction for capital allowance purposes. By this we mean, in rare circumstances, where the accounts depreciation figure is larger than the capital allowance percentage the larger figure should also be acceptable for tax. This would mean that only "one way" adjustments would be required, for higher capital allowance rates.
4.3 The simplification of the special rules for rental income would be welcome if it does not result in reduced reliefs and inadvertently lead to even greater record keeping requirements.
We have already expressed our views on capital allowances in section 4.1 and 4.2 above.
The idea of taxing capital items on an accounts basis, although it not clear what the mechanism would be as such items do not usually have a profit and account impact, is unlikely to be workable or fair for two main reasons:
i) Where there are adjustments in the accounts, for the change in economic value of an item, no physical cash changes hands. It will, therefore, not be reasonable to expect a small business to hand money over to the Government which it has not received.
ii) Even while inflation remains low it is still a significant factor over a number of years therefore we would not support the abolition of indexation relief. We would not consider the substitution of an Income Tax style Capital Gains Tax regime to be a simplification either.
4.4 There seems to be a clear desire on the part of the Inland Revenue to introduce stringent structures for accounts preparation. There is a lack of understanding that each business is different and the interpretation of the raw accounting data has to be made on an individual basis to provide a "true and fair view". In addition over the next few years the European Union as a whole will be adopting a unified set of accounting standards it is therefore not appropriate or practical for the Inland Revenue to seek the role of becoming a "standard setter".
It also appears that the Inland Revenue have an adverse opinion of the way financial statements are prepared by some accountants - specifically the smaller firms. We do not consider such a view to be warranted but will be happy to work further with the Inland Revenue in this area. We comment further under section 6.
4.5 We consider this area needs to be discussed and debated thoroughly and will defer comment for a time after we have held meetings with yourselves.
5 Unincorporated Small Businesses
We welcome the general commentary, in this section, and look forward to working with the Inland Revenue in future discussions. We would, however, consider it a regressive step adding to the burden for unincorporated businesses if they were required to produce true and fair accounts.
6 Working with Small Businesses, Accountants and Representative Bodies
We have addressed many of the issues from this section under Section 4. We note the invitation and welcome the opportunity to meet and discuss these issues further.
The view expressed at 6.5 that simplifying the tax system will free up Inland Revenue resources to help taxpayers and accountants as wishful thinking. There is little chance that there will be long term simplification or that any freed up resources would be made available in the way the Inland Revenue envisages.
6.7 The "kitemark" idea for accounting packages sounds like the second track of the Inland Revenue's approach to impose its views on the interpretation of accounting standards and hence accounts preparation, the first track being its guidance approach under section 4. We are concerned with the comments made in this section and look forward to discussing the various issues in a full and frank discussion.