Why the simple income tax plan for freelancers is too complex

Describing this legislation as ‘Simpler Income Tax for the Simplest Businesses’, is misleading: the latest proposals are anything but simple, writes Andrew Gotch, of the Chartered Institute of Taxation, in response to proposals for the new cash basis for freelancers and the self-employed.

Far more changes need to be made in a short period of time to ensure this new regime is intelligible to and workable for small businesses.

As drafted, the proposals permit small businesses to move in and out of the cash basis each year, yet provide restrictive rules on losses and interest relief. A wide range of technical tax adjustments will still have to be made.

The result of this – for freelancers and unincorporated businesses - will be a need to make detailed calculations every year to make sure you do not lose out!

No unrepresented person will be able to cope adequately with such computations, which means incurring costs for advice to get a fair result. That is a further burden on small business and one that would be unnecessary in a properly designed simple system.

We believe HM Revenue and Customs’ radical revisions to the Office of Tax Simplification’s proposals have resulted in additional rules that make the system far more complex than necessary and inherently unattractive as a package to small businesses at a vulnerable stage in their development.

We note that the government has now partially addressed the problem for businesses with turnover over £77,000 where the business owner has to use the cash basis for Universal Credit, which will potentially mean such businesses only have to prepare two sets of accounts – one for direct tax and Universal Credit and one for VAT purposes, instead of three sets. But reducing an additional burden from triple to double does not look like a good deal for small business.

Here at the CIOT, we suggest a rethink to prevent the new regime being seen as anti-business.We note that HMRC have already indicated a willingness to consult further and hope the government will challenge HMRC to grasp this opportunity to make life truly simpler for smaller businesses and make real and significant changes to the proposals. Missing this opportunity for genuine simplification would be a real loss for the UK’s small businesses.


11th December 2012

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