Pinpricks of light for SMEs buried deep in the Budget

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Budget is missed opportunity to support SMEs through economic turmoil, but cash basis consultation and promise of simplified tax are some consolation.

As is customary, the Chancellor used his recent Budget address to lay out an economic plan for the short and medium term. The focus on measures to protect and promote business investment among larger enterprises wasn’t a surprise given Chancellor Jeremy Hunt’s determination to stimulate growth in what has been a fairly moribund recent economic picture.  

Among the headline measures, the decision to extend the full expensing scheme was expected, as was the decision to stick with the planned increase in the rate of corporation tax.  

No end of HMRC problems in sight  

It was, however, a little disappointing to see so little emphasis paid to measures that would benefit smaller businesses. As a body charged with advocating for the thousands of accountants that service smaller firms, we feel it’s important to push the agenda forward on the issues that matter to them.  

And while the Chancellor heralded his introduction of ‘A Simpler Tax System for Small Businesses’, in practice it remains to be seen what impact that will actually have on accountants and their clients. 

AAT organised a letter with nine other professional bodies in the accountancy sector calling for the Government to address the current crisis of service provision at HMRC. Unfortunately those calls were in vain, leaving many accountants unsure how that particular issue will be resolved in the short term.   

Cash basis consultation a positive step  

With that said, we were encouraged by the announcement – buried deep within the 100-plus pages of the Budget book – that the Government would consult on expanding the cash basis. Cash basis is currently available to sole traders or partners with an annual turnover of £150,000 or less. It’s beneficial for some because business owners need only declare money when it comes in and goes out of the business. 

The Government will look to explore ways to expand the eligible population, improve access to the cash basis, and increase use of the cash basis within eligible self-employed businesses. 

It has identified a number of potential areas to simplify and expand the regime. These include increasing the turnover thresholds for businesses to use the cash basis so that larger unincorporated businesses can choose to use it; setting the cash basis as the default standard to calculate taxable profits with an opt-out for accruals, and thereby aligning it to property businesses where the cash basis is already the default. 

It has also raised the question of increasing the £500 limit on interest deductions in the cash basis, allowing more businesses to benefit from the cash basis and reflect the higher costs of borrowing as well as relaxing restrictions on using relief for losses made in the cash basis, allowing new businesses to use the cash basis while setting loss relief against other sources of income. 

The consultation will run over the next few months and will close on 7 June – a date that reflects the Government’s stated desire to introduce changes “relatively quickly”.  

A new dawn for UK tax?  

We, like many in the profession, were dismayed by the Government’s announcement in September 2022 of the abolition of the Office of Tax Simplification, which finally closed in March. The Government has sought to allay fears with a series of other simplification methods in the Budget. 

The Chancellor said that as part of these efforts, “Officials were given a clear mandate to focus on simplicity of tax policy design throughout the policy making process and on simplifying existing tax rules and administration”. 

One such example is the announcement of a systematic review of tax guidance and forms for small business over the next 24 months. While there has already been progress made on simplifying forms and making guidance more interactive, in the absence of a dedicated body like the OTS, it is imperative that HMRC prioritise this area and make sure the review is completed as soon as possible.  

Whether the Government will deliver on what’s promised remains to be seen, but AAT will be pushing to keep focus on prioritising tax simplification. As always, it’s imperative that accountants engage in the process, so we would urge you to get involved and make your views known.

If you would like to contribute to AAT’s Cash Basis consultation response, please contact Jack Withrington.

Adam Harper is AAT's Director of Professional Standards & Policy..

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