The OTS recently published its final report on small business taxation. Recommendations in this report are broken down into three papers. The first paper brings the various strands together, and also covers detailed recommendations on tax administration. The other two papers are stand-alone documents. Recommendations in the report were put before the Chancellor ahead of the Budget last month

The OTS was tasked with looking at the issues faced by the UK's smallest businesses and their recommendations include both technical and administrative simplifications designed to help the small business sector deal more easily with their tax obligations.

Review was focused on three key areas: HMRC's administration; disincorporation; and simplified taxation for the very smallest businesses (those with turnover under £30,000).

Key recommendations for each area are:

• Tax Administration

The OTS has found clear scope for changes to be made in the way the tax system is run and as a result has developed a range of practical changes.

These are intended to assist in areas of raising awareness of the help that is available, improving communication, improving the relationships between HMRC and the small business community and ways to gives businesses more certainty about their tax affairs.

Recommendations include the use of two-way email communication, better VAT rulings and information and a dedicated helpline for small businesses.

• Simplified taxation for the smallest businesses

The OTS established that for the very smallest business – often “one man bands” – cash accounts are widely used, whilst claiming for businesses expenses are disproportionately burdensome given the limited amounts often involved. The OTS therefore recommends that receipts and payments accounting is accepted, instead of full ‘GAAP’ accounts.

It also recommends a wider range of flat rate expense allowances be available. These methods should be the default option for qualifying businesses, with an “opt-out” allowing those to select the system that is most beneficial to them.

Furthermore, the OTS recommends a full study is undertaken of a turnover tax as a possible alternative for the smallest businesses.

• Disincorporation

The OTS identified that a number of the smallest companies would like to ‘disincorporate’ and move to an unincorporated status. The current tax system militates against this, so the report proposes the introduction of a tax relief so that companies can disincorporate without incurring significant tax cost. This would parallel the existing incorporation relief.

More information on the final report is available http://www.hm-treasury.gov.uk/ots.htm

In response to this the Government has now launched a consultation Simpler Income Tax for the Simplest Small Businesses on proposals for introducing a voluntary simplified cash basis for Income Tax and simplified arrangements for certain expenses. The proposals are relevant to individuals carrying on a trade or profession as a self-employed sole trader, or in partnership with other individuals.