Cash accounting for small businesses moves step closer

Online accountants may be interested to learn that HMRC has now published its consultation document on a proposed cash accounting system for micro-businesses.

George Osborne explained in his Budget that the new voluntary cash based system will be introduced in April 2013, along with a simplified way of accounting for certain business expenses.

Currently, all businesses are governed by the same rules when it comes to working out their profit and the tax owed. However, these rules were designed for larger organisations and place a disproportionate admin burden on micro-businesses.

Under the new proposals, small business with receipts of less than £77,000 would be able to base their accounts on the cash that comes through the business rather than coping with accruals and prepayments. The majority of self-employed people would benefit from these changes.

The government also hopes to make it easier for small business to claim expenses. For example, a freelancer who works from home may have difficulties distinguishing business expenses from personal ones and so flat-rate deductions will be introduced for things like gas and electricity.

HMRC says that about 3.5 million individuals run their own small business and more than 3 million of them turnover less than £77,000. Therefore a great proportion of small businesses will find it easier to calculate their tax if the proposals are agreed.

The consultation closes on the 22nd of June and draft legislation is expected to be published this Autumn and introduced in next year’s Finance Bill.

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