As some who read this may be aware, some of my work is undertaken on an academic basis. This gave me an opportunity late last week to discuss the proposal put forward by AccountingWEB that cash accounting be used by small businesses for taxation purposes with a person who has undertaken a serious review of this. Unfortunately the basis of the discussion precludes me from naming them. They did however offer the following reasons why it was considered inappropriate:

1. There would be some serious losers from using the cash basis. They would object vociferously. It would, therefore be almost impossible to introduce cash accounting on a mandatory basis, but only as an option. Taxation would then be done by election, with people wishing to review their basis of election either annually or periodically. This could only mean that the lowest option would be taken by reason of regular review with considerable cost resulting to the Revenue, and quite possibly to taxpayers who would feel duty bound to follow the advice of their accountants to prepare accounts on both bases before deciding which option to choose. The only certain winners were, therefore, likely to be accountants.

2. There was no actual obvious advantage to the Revenue from using the cash basis. Anti-avoidance provisions would be needed to prevent significant revenue shifting between periods, issues to do with the revenue / capital split would remain unless 100% FYAs were given, disallowable expenses would remain an issue and the tax return would be no less complicated. With the already noted problem of offering choice in the basis of calculation the option of cash accounting was seen as creating more complexity in the taxation system, not less.

3. Even if the cash option were to be offered to small business there would, inevitably come a time when a transition to an accruals (or fair value) basis would be required. In that case significant time would have to be spent on the transitional rules o ensure they were fair. The same would also be true for any business moving in the other direction. Again, this only offered he prospect of considerable increase in complexity in the range of rules hat would be faced by small businesses and their advisers, which could not be seen as desirable.

4. No one could be sure that even if this basis were adopted for tax that it would be acceptable for any other purpose e.g. would a figure for income that did not take into account actual earnings in the period be acceptable to lenders and other agencies and would it therefore be the case that two sets of accounts would be needed by many small businesses? No one was sure of the answer, and as a result it was not felt possible to endorse the cash basis.

I cannot say how authoritative this opinion is. What I can suggest is that it sounds persuasive. I really do not think cash accounting has any chance of being adopted in the UK for taxation purposes.

What I do think is that small business accounting and reporting does need to be reformed on a worldwide basis. That is an issue to which I will be dedicating some time on this blog.