The Federation of Small Businesses (FSB) has released a report, 'Taking a Toll: Small businesses and the cost of Tax Compliance'. The comprehensive document reports that small firms collectively spend over 27,000 years and nearly £25 billion per year on tax compliance, and reducing these levels would boost UK productivity.
The report was broadly critical of the red tape faced by small businesses in handling their tax issues, saying it reduced productivity and company finances and increased personal stress. The FSB's survey found that a small business owner spends 44 hours and £4,500 a year on tax compliance, an increase of around 10% since 2021.
The Key Findings and Recommendations can be found below, but highlights include:
- Calls for a significant improvement in HMRC’s level of customer service.
- A warning that HMRC should proceed with the Introduction of MTD cautiously.
- Increase the eligibility threshold for Small Employers’ Relief.
- Maintain the Business Asset Disposal Relief (BADR) rate at 14%.
Writing the foreword, Tony Baron, the FSB's Policy Champion for Tax and Finance, said, "The imbalance of power between the typical small business and HMRC, with its power to investigate, levy penalties, and prosecute, is immense... Little wonder, therefore, that the small business owner or self-employed person approaches filling in their tax returns with trepidation. Tax compliance is thorny, time-consuming, and fraught with anxiety. Trying to engage with HMRC to obtain guidance or a response to an appeal can be immensely frustrating, with the tax authority often failing to answer telephone calls or letters in a timely manner."
Key findings
Small businesses use the following sources of information to help them with Tax compliance:
- 85% use an intermediary, such as a tax accountant, agent or adviser.
- 58% use gov.uk or HMRC web resources.
- 35% of respondents rely on the Federation of Small Businesses.
As taxpayers, small businesses often need to interact with HMRC:
- 60% say dealing with HMRC has resulted in increased personal stress.
- 52% disagreed with the statement that HMRC was accessible to contact.
- 68% used the phone to contact HMRC in the last two years, making it the most popular method of contact. However, only 23% of this group rated the experience as good.
- 37% of small businesses used webchat, making it the least common method of contact, and of this group, 19% rated this experience as good.
Small businesses are preparing for Income Tax Self Assessment (ITSA), the next stage of Making Tax Digital (MTD):
- 63% of small businesses with a turnover above £50,000 already use MTD-compatible software.
- 27% of small businesses above the MTD threshold do not know when they plan to adopt MTD-compatible software.
Tax reliefs are essential to small businesses and can help them achieve economic and social objectives. In the past two years:
- 95% who claimed Small Business Rate Relief stated it was valuable to their business.
- 92% of those who claimed the Employment Allowance stated it was valuable to their business.
- 32% claimed Dividend Allowance, with 81% stating it was valuable to their business.
- 19% claimed Pension tax relief, with 91% stating it was valuable to their business.
Recommendations
HMRC should:
- Enforce shorter timescales to provide responses to taxpayers and publish the outcomes each year in its annual report.
- Impose a duty of candour on HMRC’s tax compliance officers. This will require officers to be open and honest about mistakes, and to inform small business owners under investigation of their rights within the tax investigation process at the outset, as well as the full consequences of any concessions made.
- Review and design tax investigator performance incentives so that incentives are focused on a fair investigation and not disproportionately weighted towards revenue maximisation at the cost of a fair process.
- Set a time limit on the length of HMRC tax investigations, with investigations that go over the time limit period needing a strong justification for doing so.
- Increase the visibility of the section labelled ‘tax reliefs’ on Self Assessment tax returns, and for online forms, include a pop-up or reminder to encourage taxpayers to check if they need to fill in this section if they have not done so.
- Set a target to reduce business administration costs by a third by 2028.
- Pursue the objective of economic growth in carrying out all of its functions.
- Only promote e-invoicing through voluntary standards if Government intervention is necessary, not through mandating it.
- Review the pricing of Making Tax Digital compliant software as part of the evaluation of the programme, and if needed, introduce regulation to limit price increases.
- Set a specified time limit on how long refunds from HMRC should take.
- Improve the accessibility of HMRC services.
The National Audit Office or the Adjudicator’s office should:
- Undertake audits of HMRC investigations to check that investigators are following due process.
HM Treasury should:
- Commit to making National Insurance contributions relief for hiring veterans a permanent measure.
- Increase the eligibility threshold for Small Employers’ Relief. FSB proposes two options for the Government to consider:
- Option 1: Retain the threshold for Small Employers Relief at £45,000 or less Class 1 NICs, but with the Employment Allowance reduction applied. This means a small business can have a National Insurance bill of up to £55,500, apply the Employment Allowance to bring their bill down to £45,000, and claim the Small Employers' Relief.
- Option 2: Increase the threshold for Small Employers' Relief from £45,000 to £100,000. This would be in line with the previous Employment Allowance threshold, where businesses with National Insurance contributions of up to £100,000 were classed as small businesses.
- Maintain the Business Asset Disposal Relief (BADR) rate at 14%.
Useful guides on this topic
MTD: Income Tax Pilot Tool
Are you eligible to take part in the Making Tax Digital (MTD) for Income Tax Pilot?
Compare software for Making Tax Digital for Income Tax
What's the cheapest software I can use for Making Tax Digital for Income Tax? What is the best value software that I can use?
Business Asset Disposal Relief (Entrepreneurs' Relief): Disposal of a business
Entrepreneurs' Relief (ER) was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020. When does BADR apply? What is the rate of BADR? How do you claim BADR? What BADR case law is there?
Pensions: Tax rules and planning
What tax rules apply to pensions? What tax relief is available? What tax charges can arise? What planning opportunities are there?
Dividend tax
This practical tax guide explains how dividends are taxed. It includes HMRC's own examples, more detailed examples, including an Owner Managed Business (OMB) section, together with tax planning tips.
External link
Federation of Small Businesses (FSB) report: 'Taking a Toll: Small businesses and the cost of Tax Compliance'.