The Institute of Directors has come out in favour of cash accounting for small and medium sized enterprises, saying the system more closely reflects the way non-accountants understand profit.
The OTS  recently published its discussion paper about creating a simpler income system for the UK’s smallest business. In it, the Office pointed out that a lot of SMEs probably use cash accounting already, without HMRC  noticing.
Some contractor accountants  have squashed the proposal, saying that we are so used to accruals accounting that it would be too complicated to change to a simpler way of doing things.
Danielle Stewart, from Baker Tilly, pointed out it doesn’t make sense to switch to cash accounting because all accounting software is geared towards the accruals method.
However, Richard Baron, the head of taxation at the IoD said cash accounting is the leading option and the OTS paper is a step in the right direction. It’s nonsensical to continue the way we are going, with thousands of small business owners struggling to get to grips with the technicalities of accountancy.
We already have a cash accounting scheme in place for VAT , whereby businesses can use cash accounting if their taxable turnover is between £1.35 million and £1.6 million.
The IoD did question the suggestion that small business owners and freelancers  could claim fixed allowances for expenses , such as running an office at home. The Institute felt thus could lead to large differences in the tax charged and the amount that would be due if such expenses were worked out accurately. Baron said that profits are still the most sensible basis for calculating taxation.
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