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Is cash accounting the way forward for micro-entities?

Is cash accounting the way forward for micro-entities?

Contractor accountants may be interested to know that the Office of Tax Simplification has told the government that the UK’s smallest enterprises should be allowed to use cash accounting instead of producing full GAAP accounts.

The OTS’ tax director, John Whiting, said there was a good case for a type of cash accounting and we need to do more to come up with a straightforward method of calculating the tax liabilities of micro-entities.

However not all tax experts believe changing the way businesses produce their annual accounts will reduce red tape. Steve Collings for example says that preparing accounts isn’t a problem; rather it’s the tax system that needs to be simplified. He also expressed concerns that if cash accounting is adopted, something will go terribly wrong and small companies will become embroiled in tax evasion scandals.

The cash accounting proposal only applies to companies turning over a maximum of £30,000. But this could cause problems for small businesses once their turnover exceeds that amount and they need to transition to accruals accounting.

Another expert has suggested that income should still be accounted for on an accrual basis but flat rate accounting could be applied to expenses.

The OTS also recommended that there should be more flat rate expense allowances that qualifying businesses could opt-out of if they found a more beneficial system.

Companies that want to disincorporate should also qualify for a new tax relief, said the OTS. This would reduce the administrative burden on businesses while they reorganise.

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Image: Antique Cash Register by Michael Whay

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