Small businesses that have to complete tax returns should be aware of a new reporting regime.
As companies continue to struggle to make headway in the current economic climate, the UK government has been looking at ways it can ease the burden.
HM Revenue and Customs (HMRC) has, therefore, introduced the ability to file on “cash basis” accounting and simplified flat rate expenses for the financial year 2013/14 for non-complex small businesses.
In its consultation on the proposals, the organisation wrote: “Small businesses are a key part of the economy in terms of employment and growth. They account for around 50 per cent of UK business turnover, have more than 13 million employees, and pay more than a third of the tax receipts paid by businesses.
"For small and medium-sized enterprises (SMEs), dealing with tax should be as simple and straightforward as possible. For some it is, but for many others it’s not. We want to change that."
There are now two options for filing a self assessment tax return from this year onwards. Firstly, using cash basis, where income or expenses are declared only on leaving or entering a business, or secondly, by using the traditional “accruals basis” method, where income and expenses are recorded at the point of invoice in or out of company.
HMRC explained: “The … measure will allow eligible unincorporated businesses to calculate taxable income figures on a simpler cash basis if this suits the business. Such businesses will not have to compute figures of debtors, creditors and stock, or distinguish between ‘capital’ and ‘revenue’ expenditure and will not have to compute capital allowances to arrive at taxable income.
“[Simplified expenses] will allow all unincorporated businesses to choose to use flat rate expenses for particular items of business expenditure.”
There are a number of benefits to this simplified structure. For example, firms will not have to pay income tax on money yet to be received from customers at the end of the tax year.
However, this will also mean businesses cannot offset losses against taxable income. The tax deductibility of interest will also be limited to £500.
There are some limits to who can take advantage of these altered tax laws. Business income must be below £79,000 to qualify for the cash basis accounting system. However, if small companies grow, they can continue to complete returns in the same way until their income exceeds £158,000 in any year.
Property businesses are excluded from the new rules, as are some other industries that HMRC has highlighted in guidance.
Cash basis accounting and flat rate expenses are the latest changes to the tax and PAYE system for small firms.
As of 6 April 2013, real time information requirements came into use. This dictates the level of information that must be provided to HMRC every time payroll is run.
HMRC has predicted that the new regime will drastically cut tax code errors and slash £300 million a year from the administration bills for small businesses.