A new Office of Tax Simplification (OTS) report calls on the government to prioritise action to address long-standing concerns about the experience of smaller businesses.
The report explores for the first time the tax challenges faced by businesses, referencing the stages a developing small business might go through in its engagement with the tax system. What has emerged are several long-standing concerns which now, as the economy and the world of work continue to evolve, it is especially important that the government prioritises, according to the OTS.
The report contains major recommendations in a number of areas for improving HMRC processes.
Bill Dodwell, OTS Tax Director, said: “Many new businesses are formed without sufficient help and guidance. This can lead to mistakes being made, resulting in substantial costs or penalties as their tax compliance affairs are put in order. We recommend that government offer better and more readily accessible guidance, joined-up across government and communicated through multiple channels, to help people starting small businesses.”
PAYE system problems lead to significant costs for businesses, agents, employees, and indeed HMRC itself. For example, there are around 350,000 duplicate employment records, and around 5% of returns are received late. The current system does not handle the fluidity of the modern workplace very well, for example in relation to changes of job mid-month or individuals holding multiple jobs or concurrent employment and self-employment.
Dodwell added: “It is time for a new review of PAYE, to look at areas where the inputs from employers do not work well and how they are processed by HMRC to update tax codes and the new personal tax accounts. The review needs to update PAYE for modern working patterns.”
HMRC’s data shows that over 70% of small businesses use a tax agent to help them with their tax compliance. However, HMRC does not – as yet – to provide tax agents with access to the same information as their clients or enable them to carry out a very wide range of tax transactions for them. This costs everyone time and money, the report says.
“HMRC could do much more to leverage the support agents can bring in making the tax system work for millions of taxpayers. Ensuring that the valuable role of agents is built in to all new or redesigned systems, would go a long way to support small businesses – and support HMRC, too,” Dodwell said.
Other recommendations look at simplifying corporation tax reporting in the first period when a company is incorporated and setting a more strategic approach to tax administration and system change.
Small businesses make up over 99% of all the 5.7 million businesses in the UK, employ 12.9 million people and pay over £205 billion in tax.