In July 2018, the Chancellor asked the Office of Tax Simplification (OTS) to carry out a review of tax processes for businesses. The review was asked to focus specifically on smaller and newer businesses, as they seem to have the most difficulty complying with their tax obligations.
Smaller businesses, in particular those with fewer than 10 employees and with an annual turnover of less than £2 million, make up over 99% of the 5.7 million businesses in the UK, and the pressure put on these businesses by having to deal with all the tax regulations can be huge. In around ¾ of small businesses, there is only one employee including the owner, meaning that taxation matters needs to be fitted around the everyday running of the business, during a difficult time where they really need to focus on making their business a success.
The OTS review was designed to focus on the pressure points at which dealing with tax issues would be most acutely felt. These included:
- During start-up, when a business owner is charged with putting together their business plan, advertising, getting and maintaining a client base and getting paid for their services.
- When registering for tax services, including knowing what tax services they should be registering for and how to fulfil their tax obligations.
- When hiring their first employee. Although this move may make the workload easier, it requires a lot of administration at the start, and adds significantly to the responsibilities of the business owner.
Having completed a thorough review, the OTS have made several recommendations on how the tax system could be simplified for smaller businesses. These are structured around five main areas.
Starting up a business
Starting up a business is a lengthy and complicated process, which is fraught with potential issues. For the most part, new business owners will be preoccupied with making the business successful enough to survive that difficult first year, whilst still trying to lay the right foundations for future success.
HMRC don’t need to be informed about a new business for up to 18 months, depending on when the business is set up and certain other factors, but even during this time decisions that are being made will affect tax later on down the line. Not keeping proper records could make life extremely difficult in the future and cost a substantial amount of money in hiring tax financial advisers who have to get everything together to ensure tax compliance.
The OTS have recommended that the Government should look at providing a guidance package for startups, which offers a step by step guide to what needs to be done when setting up a business. This would cover tax as well as the timeline of when things need to be recorded and reported. The idea would be that the guidance would provide a sort of ‘idiot’s guide’ from the perspective of someone with no experience of tax or business regulations, and would be a simplified version of the guidance already available on GOV.UK
Pay As You Earn (PAYE)
The PAYE system offers a simple way for the majority of UK taxpayers to pay their tax, in that it is automatically collected from employment and pension income before it is paid out to employees. This is the reason that most people don’t have to do a tax return, and offers an efficient way to ensure that everyone is paying the right tax.
However, calculations of PAYE are not always accurate, as the system is flawed and information from third parties does not always reach HMRC quickly enough. This can lead to people not being paid the right amount, having benefits delayed or being issued the wrong tax code. The frustration this causes can make employees lose faith in their employer or HMRC.
The OTS recommends that HMRC focus in on the PAYE system in an effort to tighten up any flaws in the system, and implement improvements as a priority. HMRC have been asked to focus on working closely with employers and their agents to identify the issues in the system, and come up with efficient solutions.
The role of agents
Financial services agents are an important part of compliance, as they are often the ‘middlemen’ between businesses and HMRC. As a business grows, business owners are more than likely to hire an agent to work with and for them on their finances, supporting tax compliance and completing complicated tax transactions.
The issue that was identified during the OTS review was that agents are not given full access to a number of key business and tax services, meaning that they are required to go back and forth with business owners to complete services that the client has hired the agent to do.
HMRC should look at its Agent Strategy in order to implement new structures and improvements that allow agents to work more freely within the boundaries of the tax system. It has been suggested than HMRC employ a senior official who can oversee the agent system and offer help and suggestions for further improvements as they are noted by agents and business owners.
Corporation tax is one of the tax regimes where agents are particularly relevant, as it is a complex process that many business owners do not have the time or inclination to deal with themselves. Corporation tax requires the filing of business accounts, but the accounts that need to be filed with Companies House are not detailed enough for tax purposes, and more work needs to be done to make them sufficient for submission in a tax return.
The OTS review suggested that more work needs to be done to simplify the corporation tax process, noting a particular concern that almost 60% of companies that have been formed since 2010 have needed to do two tax returns for their first accounting period – one for a year and one for just a few days.
The OTS suggests that HMRC look at how they could reduce the number of companies having to file two tax returns for accounting periods just over 12 months. They have suggested that corporation tax be simplified when brought into the Making Tax Digital scheme, so that taxpayers only see the pages and information that are relevant to them and their business.
It has also been suggested that HMRC work with Companies House to help small companies prepare accounts and tax returns that are relevant to both institutions, and have simple, useful guidance available online.
A more strategic approach to tax administration and system change
Whilst the tax system is currently undergoing major improvement and transformation, including the introduction of Real Time Information for PAYE (RTI), Making Tax Digital (MTD) for income tax and for VAT and Simple Assessment for income tax, the OTS found that there are still issues with cohesiveness across the system. The OTS particularly noted a lack of strategic oversight focusing on the end-to-end process for small business.
HMRC need to review tax payment processes across all of their core taxes to streamline them and make them more consistent. It may also be useful to map major customer journeys for small businesses across all relevant tax regimes, to identify potential improvements.
Here at TFMC we welcome the approach taken with this review. A great deal taxation errors are caused by businesspeople not understanding the complex rules correctly and making inadvertent mistakes because of this.
The best way to avoid errors and make taxation a pain free issue for your organisation is to employ a firm such as TFMC.
We can handle the full range of accountancy and taxation requirements and can also help and advice on strategic issues for your business. Contact us on 0800 470 4820 or email [email protected] for more information