Small unincorporated businesses: tax made simpler?

Emily Coltman

Chief Accountant

The Office of Tax Simplification (OTS) has published a discussion paper on how tax might be made simpler for the smallest sole traders and partnerships.

They’ve invited these businesses and their advisers to give feedback, ready for a report and recommendations that they’ll publish ahead of next year’s Budget.

So what have they suggested?

Current position

At the moment, small businesses must prepare accounts under UK Generally Accepted Accounting Policies (or GAAP for short).

This can involve a lot of complicated calculations.

For instance, hands up all sole traders (accountants and bookkeepers keep quiet!) who know what an accrual is?

No, I thought not. And why should you need to anyway? John, who takes care of our garden, didn’t go into business to be an accountant. He’s a gardener. I don’t know how to prune a rose bush and he doesn’t know how to post an accrual.

But strictly speaking, currently you should be preparing accounts under UK GAAP, carrying out all these complicated calculations, and then working out your income tax and class 4 National Insurance on the basis of the profit in those accounts.

Preparing accounts so that you can see how your business is doing is one thing and is a very good idea. But having to comply with the myriad rules of UK GAAP, for a small business, just makes it more likely that mistakes will be made.

So the OTS is suggesting different ways to calculate tax for the smallest unincorporated businesses. Limited companies aren’t included in this, because of the potential conflict with company law.

The options the OTS has put forward are:

  • Simplified calculation of profit
  • Calculation of tax using a measure other than profit

Let’s look at each of them in turn.

Simplified calculation of profit

Several different options have been put forward for this, including:

  • Allowing businesses to prepare their accounts on the basis of cash spent and received, rather than having to adjust for cash due in and out at the end of the year.
  • For certain expenses, such as business use of home, allowing businesses to deduct a percentage of turnover from their profits, rather than the actual expenses incurred.
  • Similar to the above, but allowing businesses to deduct a flat fixed amount from their profits for certain expenses.
  • Giving businesses the option to treat the cost of small assets, say those costing under £200, as part of their day-to-day running costs, rather than claiming capital allowances on them.

Each of these has advantages and disadvantages, which the OTS has written in its report.

Briefly, any of them would save time and effort for small businesses, but could result in additional tax being paid.

For example, if you were allowed to deduct 1% of your turnover for business use of home, this would be good news if your turnover was £300,000 and your actual business use of home costs were £500.

But it’s bad news if your turnover was £10,000 and your business use of home costs were actually £500.

Non-profit measures for tax calculation

As an alternative to taxing profit, the OTS has suggested different options for tax calculation, some of which are already used in other countries:

  • Tax as a percentage of the business’s turnover rather than profit, similar to the UK’s Flat Rate Scheme for VAT.
  • A flat tax charge for “being in business”, similar to a TV licence fee, which might vary depending on the business’s sector.
  • “Indicator based measures”, for example, taxing a restaurant depending on how many tables it has.

The big disadvantage with these methods would be that businesses that make losses, as many do in their first few years of trading, would still have to pay tax.

Which businesses would this apply to?

The OTS has said that these alternatives would only be available to the smallest sole traders and partnerships.

As yet they haven’t said what “smallest” means, but they’re considering setting an annual turnover limit at £20,000, £30,000, or £73,000 (the current VAT registration limit).

What do you think?

You can download the full consultation document from the OTS website.

The OTS is very keen to hear from small business owners about these measures, so if you want to share your opinion with them, you can email

The author’s view

I’ve given my feedback to the OTS.

My own view is that, for simplicity and ease of calculation, and to eliminate issues with the timing and availability of tax relief on costs, I would opt for a tax based on a percentage of turnover.

I’d vary the percentages for each trade sector, like the VAT Flat Rate Scheme, and make this method optional, so that businesses making losses in their first few years of trading can claim tax relief on those losses.

Would you agree?  Please give your views in the comments section below.

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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