Simpler income tax for the simplest small
Who is likely to be affected?
Individuals carrying on a trade or profession as self employed sole traders or in
partnership with other individuals.
General description of the measure
Eligible small businesses (generally those with receipts not exceeding the VAT
registration threshold) will be able to use a simple method to work out their taxable
profits. The simple method is based on money-in money-out recording (the ‘cash basis’),
rather than accounts prepared on an accruals basis. Businesses using the simple
method will not have to make year end accounting adjustments and other calculations
primarily designed for larger or more complex businesses. They will not have to
compute figures of debtors, creditors and stock, or generally distinguish between 'capital'
and ‘revenue’ expenditure.
Unincorporated businesses will also be able to use simplified flat rates to calculate
certain business expenses
The measure will clarify and simplify self assessment of business income, to make it
easier for small businesses to meet their tax obligations and give them greater certainty
that their tax affairs are correct.
Many businesses will benefit from adopting these measures, although they will not be
suitable for all small businesses. HM Revenue & Customs (HMRC) will ensure the
measures are clearly aimed at those who will most benefit from the schemes, and will
provide support to help customers identify which method of computing taxable income
best suits their business.
Background to the measure
The simpler income tax measures respond to proposals made by the Office of Tax
Simplification (OTS). The OTS found that small businesses are concerned about the
difficulty and uncertainty involved in preparing a taxable income figure. The OTS
published their report, Simpler income tax for the smallest businesses, in February 2012.
At Budget 2012 the Government announced that from April 2013 it will introduce a new
cash basis for calculating profits for small unincorporated businesses.
HMRC issued a consultation document in March 2012 and workshops were undertaken
with interested parties. HMRC considered all the responses to the consultation as
detailed in the summary of responses published on 11 December 2012.
HMRC published draft legislation for consultation in December 2012 and, in response to
feedback on the draft legislation and after undertaking user testing, has made some
design changes to the simpler income tax legislation.
These design changes include:
• businesses using the cash basis will continue to do so until their circumstances
change so that the cash basis is no longer suitable for them;
• businesses using the cash basis will not have to use the simplified flat rate expenses
for their cars; and,
• simplifying the legislation.
This Tax Information and Impact Note (TIIN) updates and replaces the TIIN published on
11 December 2012.
The measures will apply for the tax year 2013-14 and onwards.
Section 25 Income Tax (Trading and Other Income) Act 2005 (ITTOIA) requires that the
profits of a trade are calculated on an accruals basis in accordance with Generally
Accepted Accountancy Practice (GAAP).
Capital expenditure is not an allowable deduction for tax purposes as laid out in section
33 ITTOIA, although a business can claim capital allowances in respect of certain capital
expenditure, for example plant and machinery under the Capital Allowances Act 2001.
In calculating taxable profit, deductible expenses have to be for the purpose of the
business as given in section 34 ITTOIA. Where there is both a business and a private
use element to expenses they are apportioned to arrive at the appropriate amount to be
deducted for tax purposes.
Barristers can, under section 160 ITTOIA, use a cash basis in the early years of trading,
and on moving to profit figures prepared under GAAP can have any adjustment to profits
arising on the move spread over a number of years as provided in section 238 ITTOIA.
Legislation will be introduced in Finance Bill 2013 to allow eligible small businesses to
calculate their taxable income by taking business income received in a year and
deducting business expenses paid in a year. This will mean they will not need to adjust
for debtors, creditors and stock, and they will generally not have to distinguish between
revenue and capital expenditure. Capital allowances will remain available for
expenditure on cars only.
Eligible barristers will be able to choose either to use the new cash basis and simplified
expenses or the current accruals basis. The existing cash basis legislation for barristers
will be repealed (except for barristers already using it, for the remainder of their
For simplified expenses, legislation will be introduced in Finance Bill 2013, with effect for
the tax year 2013-14, to allow all unincorporated businesses to choose, on a simplified
flat rate basis, to deduct:
• motoring expenses for cars, motorcycles and goods vehicles;
• business use of home; and,
• private use of business premises.
Summary of impacts
Exchequer 2013-14 2014-15 2015-16 2016-17 2017-18
impact (£m) nil -165 +25 -5 negligible
These figures are set out in Table 2.2 of Budget 2013.
Economic The measure is not expected to have any significant economic
Impact on The impact of the proposals will depend on the degree of alignment
individuals that is feasible with other income calculations individuals and
and households may need to make for other purposes, such as, in the
households future, Universal Credit or for other benefits. HMRC have worked
closely with the Department for Work and Pensions to align the
respective requirements of simpler income tax and Universal Credit
as far as possible.
Equalities The proposals relate to a voluntary simplified scheme to compute
impacts business income for tax purposes. No adverse impact on equality of
protected groups has been identified.
Impact on These measures could impact:
business • all unincorporated businesses as they can choose to use
including civil simplified flat rate expenses; and,
society • eligible small unincorporated businesses that can choose to use
organisations the cash basis to simplify how they work out their profits for tax
purposes. There are approximately 3 million eligible businesses.
Research shows that a cash basis is the way many unincorporated
business customers currently calculate their tax. These new schemes
therefore potentially benefit the majority of existing small businesses
by providing them with the certainty and confidence that they are now
meeting their self assessment (SA) obligations in full and reducing
their own costs by enabling them to get their tax right first time. This
should reduce the contact HMRC receives from customers who
contact us for reassurance.
HMRC will extend the support it provides businesses by providing
guidance and tools to encourage new businesses in particular to use
the simpler schemes from day one where they fit the needs of the
business. It will also work closely with commercial software providers
and other intermediaries interested in providing recording keeping
and related tools for small businesses. It is hoped that, in adopting
cash basis from day one, many new SA business registrations (which
total in the hundreds of thousands p.a.) will avoid the need to carry
out time-consuming end-of-year accruals based adjustments.
HMRC will continue to communicate the existence and benefits of the
scheme(s) after April 2013 and, over time, it is expected that the
number of businesses which use these schemes will grow: for
example self-employed customers who transfer from tax credits to
Universal Credit (which requires monthly cash basis reporting) will be
encouraged to realise the business benefits of using the cash basis
These simplifications are intended to enable businesses to do their
tax themselves and are therefore very much aimed at the
approximately 30 per cent of customers who do not have an agent. In
addition, it is likely that a proportion of new businesses will find they
can do their tax themselves - estimates suggest around 2 per cent of
customers may in future not need to use an agent due to the
simplifications introduced in April 2013. Any growth in self-serve will
mean further customer savings.
Once established as routine, cash basis and/or simplified expenses
will make it easier for very large numbers of small business
customers to get their tax right, creating greater levels of confidence
amongst an often, unsupported, population.
Cost Time Period (yrs)
One-off Costs £3.0m N/A
Average Annual Costs £540k N/A
Total Costs (PV) £5.7m 5
One-off Benefit £0 N/A
Average Annual Benefit £6.3m N/A
Total Benefit (PV) £31.3m 5
Net Benefit (NPV) £17.2m - £34.4m 5
Impact on Administrative Burden (included in Net Benefit)
Increase Decrease Net Impact
£480k - £590k £5.2m - £7.7m -£4.8m - -£7.1m
Operational Potential options for changes to paper and online tax returns are
impact (£m) being considered. Initial estimates of the external IT costs of these
(HMRC or options are £432,000.
Other impacts Small firms impact test: the measure is targeted at small firms and
steps have been taken to consult with them directly and through their
representative bodies. As a result of all consultation responses the
legislation has been simplified, the requirement to use fixed rate
mileage expenses if using the cash basis has been removed and a
business in the cash basis will stay in the cash basis unless
circumstances change. The schemes and supporting guidance are
also being customer user-tested to ensure the process is easy for
small businesses to calculate their own tax.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
These measures will be monitored by using the numbers of businesses using the
scheme either as reported in their tax returns or using a survey to identify take up.
If you have any questions about this change, please contact Robert Nott
(email: email@example.com) or contact Tony Linehan on 020 7147 0527