Deregulation of small businesses is proceeding quietly but promisingly

Matthew Robertson 6.01am

If you weren’t already up-to-speed with age related allowances, income tax thresholds and VAT on hot baked foodstuffs, the past couple of weeks have put paid to that.

The Chancellor’s recent Budget hit the headlines for many of the wrong reasons. One man, however, has been surprisingly off the radar. Can anyone remember the Business Secretary?

Proposals emanating from the Department for Business, Innovation and Skills (BIS) caught my eye more than anything else in the Budget - and no, that isn’t because BIS is better than the Treasury at stopping leakages.

The Government has repeatedly stated that small businesses are key to the economy recovery. For instance, David Cameron in November 2010:

"I feel very strongly about the need to do everything we can to help and promote small and medium-sized businesses. They provide nearly 60 per cent of our jobs and half of our GDP."

The thinking is this: deregulate on behalf of these companies and they will invest, grow and hire new employees.

There have been no headline grabbing proposals so far but there has been some quiet progress. In October 2011, BIS released a discussion paper entitled 'Simpler reporting for the smallest businesses'. It was not a statement of government policy but it did offer ideas and evidence that the Government seems to have taken on board.

The main idea was to reduce reporting requirements for micro entities. These micro entities do not actually exist in this country yet but they were defined by the EU competitive council in February 2012 as any company that matches two of the following three thresholds:

  1. Turnover less than €700,000
  2. Gross assets less than €350,000 
  3. Fewer than 10 employees

This would cover approximately 60 per cent of UK companies registered at Companies House.

The reporting requirements for these companies would be significantly reduced. A profit and loss statement would not need to be filed at Companies House and only an abridged balance sheet would need to be prepared.

In plain English, if these proposals are adopted, a significant amount of work and expense undertaken by small companies to prepare accounts would no longer be necessary.

Meanwhile, the Office of Tax Simplification (OTS) has conducted a review of small businesses, in which it was found:

"Despite devoting time, expense and care to calculating tax and filling in tax  returns, half of small businesses worry about making mistakes in applying the rules. They also found that 20 per cent of small businesses (potentially 700,000 businesses) have difficulty working out how much tax they need to pay, and that half of all small businesses had experienced difficulties identifying what is a deductible expense."

The OTS goes on to recommend:

"Small, unincorporated businesses should have the option to calculate their taxable income on simpler cash receipts and payments basis."

It is not certain what impact these proposals would have on small businesses if implemented, but the Government hopes they will provide businesses with more assurance on tax issues, which could lead to more business confidence and a boost to the economy.

These proposals have undoubted benefits. Whether banks would be more or less willing to lend, however, is unknown, but the thinking from BIS is that complex regulation currently impedes small businesses from accessing credit. This lack of access is in turn preventing investment and hiring.

There are many difficulties, such as the concern that these basic accounts would be inferior to those published for other, bigger entities. This could counteract any help small businesses get from reduced complexity in terms of accessing credit.

Above all, these proposals do not seem to consider how useful accounts can be. For instance, a receipts and payment account does not indicated a company’s profitability and would be subject to manipulation (e.g. a company with a cash surplus of £2 million could spend all of that on a new building or a machine just before the end of the tax year, thus giving it a net figure of zero). Users of these accounts would be handicapped by the lack of recorded trading activity, not to mention the effect it would have on the tax chargeable to these companies.

A better approach would be to simplify the tax system itself, in particular by merging PAYE and NIC operations. The contributory idea of NIC has long since disappeared. Furthermore, the result would be more upfront about true total tax rates, which would help to clarify the taxation debate and possibly put pressure on the Government to reduce taxes. The Budget states that the Government is consulting on this change so we will have to wait and see.

Whatever direction we are heading, these proposals could have a great impact on small businesses across the country. What cannot be denied is that the Government is trying to make Britain appear ‘open for business’ by assisting small businesses, the bedrock of the economy.

It might not be the most fashionable or tabloid-friendly sentiment but small businesses are going to determine how quickly Britain grows out of these difficult times - not the 50p top rate, not age related allowances, nor VAT on food.

Matthew Robertson is a trainee accountant. Follow Matthew on Twitter @FlatFootTory