Small businesses face confusion over tax, according to new research published by the Federation of Small Businesses (FSB). The complexity of tax rules and exemptions applying to small firms means that on average they spend £5,000 and 15 working days every year just making sure they stay compliant, and three quarters end up paying for specialist advice.
The FSB’s Taxing Times research, published today, found that almost half of small businesses describe checking that they are paying the correct rates of tax as a challenge, while 40% are confused by the exemptions available to them. Of the battery of taxes facing entrepreneurs, VAT, PAYE taxes on Salaries, and Employers’ National Insurance Contributions seem to cause the most issues. Time taken by the typical small business on these three taxes combined totals an average of 95 hours a year.
Over the years many politicians and business leaders have called for simplification of the tax system, but the FSB’s national chairman, Mike Cherry, uses the report to suggest that it is not the taxes themselves that need to be simpler. Instead he would like to see simplification of the rules for compliance: “Our priority should be simplification of the tax compliance process. Small firms by and large understand a tax like VAT, for example, but the sheer complexity of VAT administration means they spend 44 hours a year filing returns,” he said.
Asked what changes they would like to see, clear trends emerged among the small businesses surveyed. Half would prefer to see an earlier estimation of their tax bill than currently available, while 53% would like the right to pay their taxes in instalments, helping to smooth cash flow. Mr Cherry is hopeful that the Making Tax Digital (MTD) rollout provides an opportunity to implement some of these changes. “The roll-out of Making Tax Digital needs to be seen as an opportunity to radically improve the small business user experience of HMRC,” he said. “Done right, MTD could help streamline the process of small business tax compliance.”
The MTD program aims at taking the collection of taxes online. Eventually HMRC’s aim is to apply it to all taxes, however the initial rollout will be staggered. The first businesses affected are those over the VAT registration threshold, who will be required to keep electronic VAT records and file online quarterly returns from April 2019. The planned expansion of MTD will see quarterly online filing applied to all business taxes, although implementation dates for this phase have been pushed back repeatedly.
If over-complication and lost time on taxes weren’t damaging enough for small businesses, many are losing out in another way too. The FSB’s report also found that 55% of firms were unaware of the various tax reliefs that are available to them. This is not the first time this issue has been noticed, In December research commissioned by HMRC showed that a large number of business owners did not know that they could claim Entrepreneurs’ relief against Capital Gains Tax when selling all or part of their business.
Mike Cherry sees this as a crucial part of efforts to fire up productivity in Britain’s economy: “There are lots of useful tax reliefs out there but many small firms simply don’t know they exist or don’t have the expertise to access them,” he said. “There needs to be a real push from local and central government to ensure small firms are aware of all the reliefs available. If we get the small firms that account for 99 per cent of the business population accessing these incentives we’ll be on the way to the incremental output gains that are critical to closing our productivity gap.”