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Small Businesses Welcome Commons Report On Tax Compliance

by Robert Lee,, London

06 November 2007

The Federation of Small Businesses has welcomed the conclusions of a report by the House of Commons Public Accounts Committee, which has called upon the UK tax authorities to simplify tax compliance for the hundreds of thousands of small businesses that start-up each year.

More than 700,000 new businesses register in the UK every year, and 12 million people in the UK are employed by small firms. However, according to the FSB's Tax Chairman, Bill Knox, more than half of all new businesses fail in their first year, and HM Revenue and Customs has an important role to play in reducing this failure rate, by making it significantly easier for start-ups to comply with their tax obligations.

“When starting a new business the owner is taking a great personal risk and the state should do all it can to support them. If they succeed then they will provide employment for people in their local community and taxes to fund public sector services. But sixty per cent of new businesses fold in their first three years," Knox stated in response to the report.

“This report rightly recommends that the tax authorities make it easier for new businesses to register for tax and provide advice to them on how to meet their obligations. This will enable more businesses to grow and prevent them from innocently falling foul of the authorities because of the complexities of the system," he added.

The PAC's report, published last week, suggested that HM Revenue and Customs can improve its services to small business in several areas, particularly with regard to the provision of online services, the dissemination of information, and a reduction in the overall level of bureaucracy. The report issued the following conclusions and recommendations:

Businesses have to register separately for each tax, and provide the same information, which duplicates effort for them and the Department. To conform with international best practice, the Department should introduce a single registration system. Registration should also be available online, with appropriate validation checks to facilitate accurate completion of the form.

Only 20% of businesses currently register online for VAT and 25% for PAYE. Online registration is easier and cheaper for businesses and the Department. In Australia, 96% of businesses register online for a business tax number, while 85% of registrations with Companies House are conducted online in the UK. To increase the uptake of online registration, the Department should advertise the benefits to businesses, for example on the Business Link website.

Businesses have to use different reference numbers for each tax in their contacts with the Department. The Department plans to introduce a "customer index" to link its data on taxpayers, but this will not help businesses to simplify their tax affairs. It should introduce a unique identifier to make it easier for businesses to deal with the Department, and to provide a basis for linking services to businesses across the Department and, in due course, across government.

The Department does not have readily available data on the extent to which different groups of taxpayers meet their obligations. As a result, it is poorly placed to assess priorities, and the costs and benefits of action to improve compliance. The Department should analyse the compliance record of different taxpayer groups and of the track record of individual businesses so it can target its work and assess its effects.

61% of new businesses file their PAYE/National Insurance returns on time, compared to 80% of the business population as a whole. Rates for filing other tax forms on time are also lower among new businesses. The Australian Tax Office has concentrated on helping new businesses with inexperienced owners who are least likely to understand their tax, leading to improvements in compliance levels. In targeting its efforts to increase compliance, the Department should give due weight to the level of risk associated with new businesses.

Nearly 50% of businesses do not pay PAYE/National Insurance contributions on time. The Department cannot impose a penalty or interest for late monthly payments of PAYE/National Insurance contributions during the year. It can do so only on balances due at the end of the tax year. Unlike some other taxes, the Department is also unable to impose penalties on businesses that register late for PAYE. It should seek powers to remedy this situation.

The Department's guidance requires an average reading age of at least 16 or 17 years to understand it, but over 5 million adults have literacy skills well below this level. The Department should make its guidance easier to understand by using plain English, and improving the layout.

Workshops and seminars giving advice on tax obligations do not run to full capacity, and only around 8% of newly registered businesses attend. There is a high rate of late cancellations. The Department needs to make it easier for new businesses to obtain the advice they need. It should:

  • Explore alternative methods of providing workshops and seminars to increase take up, including online and outside normal working hours;
  • Make its website easier to use; and
  • Work closely with the organisations that new businesses consult for business advice to provide help through those channels.

The Department operates two helplines for the newly self-employed, one for new employers and seven more covering different taxes that all businesses can contact. Businesses have to contact different helplines for advice on different taxes. It should work towards a one stop telephone system to cover all taxes. The Department needs to develop the technical and operational capability to give helpline staff access to taxpayers' computer records, and to route enquiries to advisers with the requisite expertise.

Only around one half of small businesses are aware of the different schemes available to simplify the tax requirements for small businesses. If all those eligible took advantage of just two of the schemes, they would save at least GBP50 million a year. The number of different schemes and how they can be used in combination makes it difficult for businesses to decide whether they are beneficial. To improve take-up, the Department should advertise more widely the financial benefits to businesses of using them. It should also assess the costs and benefits of introducing a single simplified VAT scheme.

Commenting on the report's recommendations, Edward Leigh MP, Chairman of the Committee of Public Accounts observed:

“The last thing anyone starting a new business wants to do is spend a lot of time talking to the tax man. But new businesses are frustrated by having to register separately with HMRC for each and every tax they have to pay. This is because the Department is hampered in having a separate computer system for each tax. It must push towards a system where a new business registers just once for all the taxes it must pay."

"It is also ridiculous that owners of new businesses are badgered by different parts of HMRC all wanting the same bits of information. Providing each business with a unique tax reference number would be an important step towards the Department being able to have an overview, for each business, of all of its tax affairs."

He concluded that "it is vitally important that new businesses get the assistance and simplified requirements they need so that, right from the start, they can get their tax affairs in order and are well-placed to continue to comply as their tax affairs become more complicated".

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