By Maximilian Clarke

Tax businesses on profits, not turnover, in order to minimise 'serious distortions' in returns, the Institute of Directors has said.

The Institute today publishes its response to the Office of Tax Simplification’s discussion paper “A simpler income tax system for the smallest businesses”, arguing that whilst simplification in the tax system is to be welcomed,

There is a lot of merit in allowing small businesses to calculate profits on a cash basis. “Cash in minus cash out” is how many people who have not studied accountancy are likely to understand profit anyway. And many small businesses probably already use cash accounting, without the Revenue’s noticing.

Fixed deductions for certain expenses, like the cost of running an office at home, might offer simplicity, but if they covered large items, they could lead to significant differences between the tax charged and the tax that would be charged if the expenses were calculated accurately.

Tax based on turnover, or a fixed tax per business, would lead to very serious distortions, and such ideas are unlikely to be worth pursuing.

“This document is a good start. Even the ideas that would be bad for business should be put up for discussion, because we can then rule them out and know that we are doing the right thing by focusing on the remaining ideas," said Richard Baron, Head of Taxation at the Institute of Directors. "Cash accounting is definitely the leading option. It is crazy to continue as now, and require thousands of people running small part-time businesses to grapple with the technicalities of accountancy.”

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