Following the announcement by the Chancellor the Office of Tax Simplification is proposing changes to the accounts needed for tax return purposes.   Those that may benefit are the self employed with gross sales income up to the VAT threshold of £77,000.  The scheme will continue to be available to registered businesses if turnover grows beyond £77,000 up to an annual limit of £150,000.

The significant change proposed is that the accounts will be on a cash basis so there is no need to account for unpaid sales or purchases.

Other changes suggested are:

• Equipment, other than cars and motor bikes, will be claimed in full in the year of purchase.
• The record keeping for the use of a car will be simplified and a mileage allowance given instead for business miles.  The rates will be 45p for the first 10,000 business miles in the year and 25p for additional business miles.
• Flat rate allowances for use of home will also be given if use of home for the business is more than 25 hours a month.There will be no need to disallow a private proportion when there is insignificant or immaterial private use of equipment, stationery and other small items.

These changes would certainly make record keeping much simpler for many businesses.  Rather than needing to keep detailed records the maintenance of logs for mileage and use of home should be sufficient. 

The proposals do, however, also include some restrictions to expenses that are currently claimable.  Loan interest and arrangement fees will not be allowed on the grounds that the cost of the purchased items is given in full.  There are also proposed restrictions to the use of losses should they arise.

I am concerned that the changes may well simplify record keeping and accounts preparation but at a possible cost to the business.  At present most businesses can already claim up to £25,000 of capital expenditure in full in the year of purchase so the relief being offered will only apply if the business spends more than £25,000 in the year on equipment.  This may well be unlikely for a business with gross sales of less than £150,000.

The change to loss relief could also affect businesses.  At present relief can be carried back to earlier years or set against other income in the same year so that a refund of tax paid can be made.  The proposals do not allow for this.

As I understand the proposals they will not be obligatory and businesses will have to opt in to take advantage of the simplifications.  I think small businesses will be best advised to look at the likely disadvantages (loss of relief for bank interest, inflexible loss relief and the like) before deciding that this is red tape they really want to cut.

You can view the consultation document by clicking here.

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