At the moment, all UK businesses have to prepare accounts on what's called the "accruals" basis. In essence, in any year, you look at income and expenditure in terms of what you've earned and the costs you've incurred, rather than on the basis of when payments have been made between you and your customers and suppliers. So if you do £10,000 of work in March 2013, it gets taxed in the year ending 5 April 2013. It doesn't matter if you don't invoice the customer until 6 April, or if you don't get paid for a couple of months. What matters is when you really earned the income. It works the other way too - if a customer pays you a big deposit just before the end of the tax year, it doesn't form part of your income for that year - it'll be taxed as income in the next year, when you actually do the work.
From April 2013, smallsole traders and partnerships are going to have the option of preparing accounts on a cash basis. So, that deposit that gets paid just before the year-end will get taxed, even if you've yet to earn it, and if you ask your customer to pay you on 6 April 2014 rather than 5 April 2014 then that will successfully delay some tax by twelve months. The idea is that this will make tax returns simpler for small businesses to prepare.
I think this is an extraordinarily poor idea, for a number of reasons. Most significantly, it's based on a complete misunderstanding of the fundamental purpose of accounts.
The principal purpose of accounts is to give information about how a business is doing so that its owners/managers can make sensible decisions about the business - could it do better, could it do things differently, are there things that are working better or worse than expected, or than they used to, are the owners completely wasting their time?
The principal purpose of accounts is NOT to enable a business owner to discharge their legal responsibility to make a tax return. That ought to be a byproduct of accounts, not the main reason for them.
So, this change is going to encourage people to prepare easy accounts rather than useful and meaningful accounts which help them to make sensible decisions.
Cash is not always a good guide to how a business is doing. Cashflows tend to be irregular, so assessing the performance of a business over time using cash can be misleading. If a big customer pays you three months' invoices in one go, does that mean June was rubbish, July was rubbish and August was great? No. All three months were probably fine in terms of profit (although you could maybe do with improving your credit control). So cash accounting isn't a good basis on which to ask the small business community to keep their records.
Of course, you could always prepare one set of proper accounts that tell you how you've really done, and another set on a cash basis for the taxman. But that isn't simplification, that's adding a layer of complexity to the system.
It also sets up some pretty odd incentives. If you get a customer to pay up front before you do some work for you, is that a good idea? Of course, it's a brilliant idea, as it gets rid of the risk of non-payment. But this new system could incentivise you to turn down the deposit, so that you can delay paying tax! Similarly, you get to the end of the year not really needing any stock. But if you buy a load of stock, you'll delay paying some tax. So you buy some stuff that you maybe don't even need. Of course, if you're smart you'll accept the deposit and defer buying the stock, and take the tax bill on the chin rather than pushing it back a year. I can see some people being encouraged to make poor business decisions to delay tax payments though.
Also, good luck with getting a mortgage when the cash accounts you prepare for your business and give to the mortgage company show an unusually low profit in year one, when in actual fact you did much better but just didn't get paid until after the year-end, or bought a load of stock before the year-end. Mortgage companies are obsessed with getting an SA302 (the HMRC printout of your declared income for the year) and that will show your cash accounting income.
Without doubt, there are plenty of very small businesses that effectively submit their tax returns on a cash basis already, out of understandable ignorance of the rules. That's effectively tolerated since HMRC don't have the resources to check up on the vast majority of small businesses anyway. Those businesses (and those where cash accounting and proper accounting give pretty similar results, as is often the case) could have happily carried on doing that, without a change to the rules. However, it seems to us that extending the option to other businesses is just adding complexity to the system, and also encouraging business owners to move away from useful accounts to easy accounts. If we're trying to foster enterprise and business in this country, that's a terrible idea.