Small businesses are a major part of the UK economy. They 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.
This report explores for the first time the tax challenges faced by businesses by reference to 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.
The report contains major recommendations in five areas and other smaller suggestions 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.
The UK’s PAYE system is the UK’s major tax collection system. It brings in about 40% of total tax receipts - some £200 billion. It has been transformed over the last decade, with the introduction of an integrated national system and the provision of real time information by employers.
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.
Bill 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.
Bill Dodwell said:
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.
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.
Kathryn Cearns, OBE, OTS Chairman, said:
Small businesses – of which there are millions - are a core concern and area of interest for the OTS, so it is pleasing that this is the subject of the first OTS report published since I became Chair. The long-standing concerns highlighted, about businesses avoiding mistakes as they get going, the workings of the PAYE system and the priority given to the role of agents, are not easy things to improve quickly. So it’s all the more important that the OTS continues to highlight these issues.
Notes for editors
About this report
The report was commissioned by the Chancellor of the Exchequer and the scoping review was published in July 2018.
It is a particular priority for the OTS to focus on improving the experience of individuals and smaller businesses in engaging with the tax system. During this review, the OTS consulted many individuals involved in smaller businesses, advisers and representative bodies.
HMRC defines a small business as one with annual sales not exceeding £20 million, which employs no more than 20 people. A micro business is one with sales up to £2 million and no more than 10 employees. 75% of small businesses do not employ anyone other than the owner(s).
About the Office of Tax Simplification
The OTS is the independent adviser to government on simplifying the UK tax system, to make it easier for the taxpayer. It does not implement changes – these are a matter for government and for parliament.
The OTS works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden - which is what people encounter in practice - as well as looking to simplify the rules. Simplification of the technical and administrative aspects of tax are important, both to taxpayers and to HMRC.
The OTS chair is Kathryn Cearns OBE and the Tax Director is Bill Dodwell.
Press Enquiries only please contact Graham Dickson, OTS Press Officer
Phone: 03000 585017