Small businesses owners spend an average of £4,500 a year making sure that they comply with UK tax laws; the Federation of Small Businesses is campaigning to get that cost reduced.
The Federation of Small Businesses (FSB) is calling for the cost of tax compliance to be lowered by a third, a time limit to be set on tax investigations, and for HMRC to speed up replies to customer queries.
FSB research shows that small business owners spend an average of £4,500 and 44 hours per year on tax admin. It means that tax compliance costs the UK small business community nearly £25 billion a year. The toll is not just financial - three in five small business owners (60%) say that dealing with HMRC has increased their personal stress.
"We all deserve a tax system that is fit for purpose, overseen by a tax authority which takes steps to make compliance as simple and painless as possible. But at the moment, many small businesses encounter just the opposite. We have set out an agenda for reform - now it's up to HMRC and the government to take up the challenge. Getting tax right will unleash small firms' productivity, helping us get the growth we need." Tina McKenzie, FSB policy chair.
The findings, from a survey of over 1,400 small business owners, come from a new FSB report, Taking a Toll: Small businesses and the cost of tax compliance. The report tallies up the demands - in terms of stress and time, as well as the financial costs - levied upon small business owners when they engage with the tax system. Those costs include time spent trying to contact HMRC, the cost of staff time used to manage compliance, and the price of software subscriptions and/or an external accountant.
Poor levels of customer service from HMRC
More than half (52%) of small firms say that they find HMRC difficult to contact. The telephone is the most popular method of communication with the tax authority, used by 68%, but only 23% of that group say their experience of dealing with HMRC over the phone is "good".
"Any business owner will tell you how stressful it can be to try and get a resolution from HMRC to a problem or a concern related to tax, and our survey found widespread dissatisfaction with levels of customer service at the tax authority." Tina McKenzie, FSB policy chair.
Making Tax Digital for Income Tax looms
HMRC's ongoing Making Tax Digital (MTD) programme, which aims to move businesses over to filing their taxes digitally, will be expanding its net as of April next year. After that date, all businesses with turnover above £50,000 will be required to have moved over to MTD for Income Tax Self Assessment, while those with turnover between £30,000-£50,000 will have until April 2027 to make the switch.
Despite this looming deadline, over a quarter of small firms (27%) who will be caught up in MTD eligibility say they do not know when they plan to adopt MTD-compatible software, driving concerns of a digital gap.
"Tax compliance is far from a niche issue - it affects all five and a half million small businesses in the UK, costing them £4,500 and 44 hours a year each on average. This is money and time that could be far, far better spent on building up their business, and the overall cost to the economy in terms of lost growth and wasted productivity is enormous." Tina McKenzie, FSB policy chair.
FSB recommendations for HMRC
The FSB report sets out a series of recommendations to help make business tax collection and compliance simpler and easier, including:
- Set a target to reduce business tax administration costs by a third by 2028. The FSB says that aiming to bring the average tax compliance cost of £4,500 down to £3,000 can be achieved - HMRC should set a target to track this cost and publish annual updates.
- Impose a duty of candour on HMRC's tax compliance officers. This will require officers to be honest about mistakes, and to inform a small business owner under investigation of their rights at the outset of an investigation, to build trust between tax collector and taxpayer.
- Set a time limit on the length of HMRC tax investigations. Currently, full enquiries on average can take up to 18 months to finish; however, this is not strictly enforced, and some small businesses have undergone investigations that have taken years.
- Review the pricing of Making Tax Digital-compliant software. Many small businesses are about to sign up for MTD software for the first time; they may need regulatory protections so that they are not subjected to excessive price increases.
- Enforce shorter timescales for HMRC to provide responses to taxpayers. FSB recommends that HMRC should meet the performance standards it has set internally for most tax queries, which is a response time of 15 days and a statutory limit of 30 days.
Written by Rachel Miller.