Simplifying small business tax
Around the world there are numerous initiatives going on to reduce the compliance burden on small businesses. The New Zealand Institute of Chartered Accountants (NZICA) and Tax management New Zealand have released a discussion paper that is well worth a read for those interested in small business productivity.
The report focuses on Tax as their research shows that of the overall compliance burden – taxation makes up 42% of the load.
You can read the report and comment here: http://www.smetax.co.nz/reports/
The key recommendations in the paper that I took notice of include
- Basing tax on turnover (revenue)
- Introduction of cash basis of accounting for income tax
My comments on the report are as follows.
It’s great to see the thought that has gone into this and some great ideas floated. Thank you.
In our experience small businesses are in all shapes and sizes. So coming up with a formula that fits all will always result in large (actual) numbers of businesses being disadvantaged. As you note, low margin businesses don’t suit a turnover approach.
As an accounting software vendor the perspective that we would add is that some of the reasoning behind this paper appears to stem from the way existing small business accounting software works. For example accrual accounting is hard if the software does not do it for you. Yet accrual accounting makes sense because it matches income and expenditure – but in most software systems it’s too hard to get both a cash and accrual perspectives.
Compliance costs are high in part because of the friction of accountants getting access to the data. We’ve heard that 35% of accounting fees are around getting access to the data and ‘pick up put down’ costs of working in a disconnected way. So some of the policy suggestions can be addressed with better software that makes the hard stuff easier and reduces the unproductive cost of moving data around (and we’re trying to do that as fast as we can).
We should not confuse policy suggestions arising from existing software not being smart and fundamental tax changes that can drive productivity.
We would see moving to a cash basis as a big step backwards.
An example of good policy that gained limited traction for environmental reasons was the GST Ratio Method for Provisional Tax introduced last year. In part this may have been because accountants did not have good access to client accounting data within the period, without incurring fees back onto business to get a picture of their books. Therefore accountants did not promote the change and it had minimal take up.
Hopefully our perspective adds something to the discussion.
Rod Drury CEO – Xero (http://www.xero.com)
We feel really strongly about this and we’re starting to see the benefits of well designed software. The big goal in the paper is:
“no more than one hour’s tax compliance cost per month”
We are delivering on that:
It’s great to see some thought leadership happening in the area. Either comment directly on the SMEtax website, or comment below and we’ll forward your feedback.