Budget 2012: Cash-based accounting

Accounting can be a nightmare for small firms. The Chancellor hopes to change this by introducing cash-based accounting for very small firms.

The summary:

Tax returns for small businesses (with a turnover up to £77,000) will be simplified and based on a cash basis.

From the horse’s mouth:

Chancellor George Osborne said: “We will radically change the administration of tax for our smallest firms. Last year, I asked the Office of Tax Simplification for recommendations. They have proposed that we tax small firms on the basis of the cash that passes through their businesses, rather than asking them to spend a huge amount of time doing calculations designed for big business.

“I agree. So we will consult on this new cash basis for calculating tax for firms with a turnover of up to £77,000 – double what the Office proposed. This will make filling in tax returns dramatically simpler for up to three million firms.”

Our verdict:

Cash-based accounting will make life simpler for small businesses, which is good. The impact on Britain’s economy isn’t huge though, as it only affects firms with a turnover of up to £77,000.

Your verdict:

Saurav Chopra, CEO of Huddlebuy.co.uk:  “New cash accounting rules should receive a cautious welcome – but the devil is in the detail and the new rules may even hamper small companies if entrepreneurs end up having to pay tax sooner. Whatever happens this is a drop in the ocean when it comes to the sea of red tape facing British businesses.” 

ACCA’s head of tax, Chas Roy-Chowdhury: “Allowing for cash accounting is a good idea if it helps SMEs but HMRC need to make sure that it doesn’t affect the credibility of the tax system and isn’t a Trojan horse for ever-rising thresholds.”

Steve Theaker, senior tax partner at UHY Peacheys: “Smaller businesses will be affected by the new measure to introduce the cash basis of accounting for companies with a turnover of less than £77,000 a year. This means they will only pay tax when their debtors have settled their bills. This potentially improves the cash flow for some of our smallest businesses; it removes uncertainty and hopefully encourages many of them to grow.”

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