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Is it Time for Small Business Tax to be Simplified?

Contributed by Sussex SEO
May 30, 2019

Small businesses are the lifeblood of the British economy, accounting for more than 99 percent of the 5.7 million firms currently operating in the UK. Small businesses employ 12.9 million people and pay more than £205 billion in tax, yet there are growing concerns that their growth is being hampered by an unnecessarily complicated taxation system.

The Home Secretary Sajid Javid is the latest in a long line of influential individuals and groups to argue that the current taxation regime should be simplified. The Minister recently launched the Think Small report in conjunction with the Centre for Policy Studies (CPS), which proposes that a simple consolidated tax should be introduced for businesses with a revenue of less than £1m to replace business rates, corporation tax, VAT and employer's National Insurance. But how would the new tax system work and what current pain points would it remove?

What's wrong with the current tax system?

The view of influential groups such as the Federation of Small Businesses (FSB), The Office for Tax Simplification (OTS) and the Centre for Policy Studies (CPS) is that the current tax system is having a detrimental impact on the ability of small businesses to invest and create jobs.

Research by the FSB found that 60 percent of its members believe the tax system is negatively affecting their ability to run their businesses effectively. Primarily, that's due to the large sums of money and long hours they are having to spend to meet their tax obligations.

A report published by the FSB, entitled Taxing Times, found that small businesses were spending an average of £5,000 every year on tax compliance. It also revealed that:

  • 77 percent of small firms rely on specialists to get their taxes right
  • 55 percent of small firms don't feel informed about the available tax reliefs
  • 46 percent have difficulty determining the tax rate they're required to pay
  • 38 percent have difficulty understanding thresholds

A YouGov poll commissioned for the Think Small report also shed light on the difficulties small businesses are experiencing. It found that 75 percent of more than 2,000 small business owners believe the current tax regime is too complicated, while more than a quarter said they'd be happier to move to a new system even if it meant they had to pay more tax.

How would the new system work?

The report from the Centre for Policy Studies suggests that businesses with a revenue of less than £1m should be given the option to replace their current tax obligations with a simple consolidated tax. It would remove much of the overwhelming paperwork that needs to be filled out and generally make life much simpler for small business owners.

The Treasury believes a simple consolidated tax would raise the same amount of money as the current tax regime. The Think Small report also suggests that any businesses that do find they are paying more under the new tax system will be able to revert to the old regime.

The report also recommends that tax relief should be introduced on self-funded training for sole traders, and businesses with eight or fewer employees should benefit from a three-month National Insurance holiday on new hires.

Five areas for improvement

The Office for Tax Simplification has produced its own report on the topic, entitled Simplifying Everyday Tax for Smaller Businesses, which has been backed by the Chartered Institute of Taxation (CIOT). It advises the government to offer better and more readily accessible tax guidance for small business owners, which is communicated across multiple channels. The report also contains five major recommendations in a range of areas to simplify the tax challenges new businesses face. That includes:

1. More support for small businesses

The report recommends that the government should create a package of start-up guidance that takes new business owners step-by-step through the different factors they need to consider at key stages of the business. Tax should play a major part, but not be the only focus of the package, which should reflect the needs of a wide range of different business types. A number of delivery channels should also be adopted to make the package as accessible as possible.

2. Improving PAYE

There has been significant criticism about the introduction of Real Time Information (RTI) for PAYE. While it has achieved a number of its goals, such as giving HMRC faster access to information and increasing the accuracy of universal credit payments, tax credit and the accuracy of tax codes, it's yet to deliver other benefits such as transparency or accessibility. The OTS recommends that HMRC takes a strategic focus on PAYE to ensure there is appropriate oversight of the system and that the commitments made by HMRC are realised.

3. Making corporation tax returns easier for businesses to do themselves

Corporation tax is one of the tax regimes small businesses struggle to get to grips with themselves. The OTS recommends that HMRC works with Companies House and other partners to develop digital options so small businesses can prepare their own accounts and tax returns. That would include the provision of templates to ensure consistency and simplicity.

4. The role of agents

Tax agents play a major role in helping small businesses meet their tax obligations. However, under the current system, agents are unable to access a number of key services, which puts the onus back on their clients to complete tasks they'd rather not do.

While an 'Agent Strategy' was put in place by HMRC in 2014, its implementation has not been a priority. The OTS believes a senior official should be appointed by HMRC to oversee the implementation of the Agent Strategy. HMRC should also build the needs of agents into its system design so that agents are copied into key exchanges with clients and client data is made available for agents to view.

5. A more strategic approach to tax administration

The tax system has undergone major changes over the last few years, but there has been little evidence of consistent strategic oversight, with major inconsistencies in the customer journey across the tax regime. The OTS would like to see HMRC map customer journeys across small business taxes and take steps to align and streamline their experiences.

A significant simplification for small firms

With 62 percent of small businesses feeling the government is not on the side of small businesses, and 68 percent believing the current tax system is not sympathetic towards the needs of entrepreneurs, it's time to make a change. Whether it follows the recommendations of the OTS report or introduces a simple consolidated tax system as outlined by the CPS, the government now has the chance show it's truly backing small businesses and their owners.


About the author: Simon Renshaw is an insolvency practitioner and director of AABRS, a company that provides a range of debt advice and rescue services to small and medium-sized businesses.


Tags: tax | business | small business | Tax | services | Insurance | corporation tax | employees | accounting | tax compliance | mining | Federation of Small Businesses (FSB) | compliance | trade | training | individuals | entrepreneurs



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