The role of paid tax agents in supporting the compliance of small and Mid-sized businesses

Question 1

1. Glossary

Accepted Answer

Term	Definition
Compliance	Businesses liable for tax should provide the tax authorities with true, accurate and complete data, which the tax authorities need for tax collection. Businesses should state all facts, on which their claims are based, and submit evidence, with which these facts are proven.
Corporation Tax	Tax paid on profits from doing business as a limited company, any foreign company with a UK branch or office or a club, cooperative or other unincorporated association.
Growing business	Within this report this refers to a business with a 10%+ year-on-year growth in revenue (in the last 3 years)
Larger Mid-sized businesses	Within this report, larger Mid-sized businesses are defined as those with a turnover of more than £50 million. This excludes the UK’s largest 2000 businesses which are looked after by HMRC’s Large Business service.
Making Tax Digital	Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their tax affairs. HMRC’s ambition is to become one of the most digitally advanced tax administrations in the world. Since 1 April 2019, most VAT-registered businesses with a taxable turnover above the VAT threshold (currently £85,000) are now required to keep their VAT records digitally and use Making Tax Digital software to submit their VAT Returns direct from their digital records.
Mid-sized businesses	HMRC currently defines Mid-sized businesses as those with Corporation Tax or Income Tax Self Assessment turnover between £10 million and £200 million or have 20 or more employees. There are additional criteria that can also qualify a business as Mid-sized, for example, if it has more than ten partners.
PAYE	A method of paying income tax and national insurance contributions. The employer deducts tax and national insurance contributions from the employee’s wages or occupational pension before paying you your wages or pension payment of the net amount to the employee.
Professional body	An organisation with individual members practising a profession or occupation in which the organisation maintains an oversight of the knowledge, skills, conduct and practise of that profession or occupation.
Self Assessment	Self Assessment is a system HMRC uses to collect Income Tax. Income Tax which is not deducted automatically from wages, pensions and savings must usually be declared by use of a Self Assessment return.
Small business	HMRC defines small businesses as those with a turnover of below £10 million and fewer than 20 employees.
Smaller Mid-sized businesses	Within this report, smaller Mid-sized businesses are defined as those with a turnover of £10 to 50 million
Static business	Within this report this refers to a business with a +/-5% year-on-year growth in revenue (in the last 3 years).
Tax agents	A person representing and paid by taxpayers to file online tax returns, pay the tax due (if any) at the time of filing, or provide tax advice.
VAT	Value Added Tax (VAT) is a tax levied on the majority of goods and services provided by VAT registered businesses in the UK. VAT registered businesses must charge VAT on their goods and services and may reclaim any VAT they have paid on business-related goods or services. VAT registered businesses must report to HMRC the amount of VAT they have charged and the amount of VAT they have paid.

Question 2

2. Executive summary

Accepted Answer

The findings in this report reflect the policy and attitudes of participants at the time it was conducted, in 2017.

2.1 Introduction

HM Revenue and Customs (HMRC) is committed to reducing the tax gap in the UK – the difference between the amount of tax paid to HMRC and the amount that should have been paid. Small and Mid-sized businesses account for around half of the 2019 tax gap , and so are a clear priority for HMRC’s support and attention. The great majority of these businesses use one or more tax agents to assist them with their tax affairs. Agents therefore play a valuable role in supporting their clients to get their tax right. HMRC wishes to gain a greater understanding of how tax agents support small and Mid-sized businesses to comply with their tax obligations, and to explore the potential for HMRC working with and through agents to improve compliance further.

HMRC commissioned Kantar (Public Division) to conduct qualitative research using depth interviews and a journey mapping approach to explore the relationships between businesses and agents, and how these change over time. Specifically, the research sought to:

examine the relationships and interactions between businesses and agents
identify the points in the year and on the business development journey at which errors and other reasons for non-compliance occur or are at risk of occurring
determine how HMRC could intervene at these points or elsewhere with actions, support and other policies to reduce non-compliance and close the tax gap

2.2 The business-agent relationship

The business-agent relationship was generally long-term and stable. The ongoing nature of the relationship resulted in a mutual trust being forged.

Small businesses tended to have simple tax obligations, but a lower capacity and capability to manage them independently. As a result, they were heavily reliant on their agents. Small businesses tended to outsource most of their obligations and rely on quick informal communications with agents rather than regular meetings. Agents were also instrumental in shaping small businesses’ record keeping practices, whether through providing simple spreadsheets or recommending software. The level of internal tax knowledge and the cost of services influenced how businesses used their agents in these ways.

Smaller Mid-sized businesses tended to have lower levels of internal tax expertise than larger Mid-sized businesses. They used their agents to assist on a range of tax regimes and to complete standard checks on their accounts. The use of their agent did, however, often extend beyond simple tax purposes. Instead, the relationship was more of a partnership. Tax agents were often asked for advice on broader non-tax issues, and some were involved in ongoing business planning. Larger Mid-sized businesses commonly had higher levels of internal expertise. For some this involved numerous dedicated finance teams, each with extensive knowledge and experience. As a result, they were often less reliant on their agent, instead using them as a final check on the figures shown and the calculations used in their accounts.

2.3 Attitudes to tax compliance

Businesses recognised that they were ultimately responsible for compliance and considered it to be of upmost importance. Businesses were motivated to be compliant for transactional reasons and moral reasons. Transactional reasons relate to the everyday processes and systems which businesses have in place to run a company. For example, keeping a close eye on spending, profits, losses and how much tax should be paid. Moral reasons refer to the motivation businesses felt to pay their fair share of tax and the necessity of paying taxes to support public spending and wider society.

Compliance was also of significant importance to agents. This was driven by their desire to maintain a positive professional reputation and to do ‘the right thing’.

2.4 Recognising and managing risk points for non-compliance

The research sought to identify the key points at which businesses were most at risk of non-compliance. Across business sizes, there were four common points that were identified.

Business set up

Those who had not previously run a business did not always know what questions to ask their agent, and what their obligations would be at each point in the year. This put them at higher risk of non-compliance. Their capacity to work closely with agents to define their obligations was also limited; they often had less funding available to allow for this. Where new businesses had a previous relationship with their agent, they were at a lower risk of non-compliance.

Regular returns

Small and smaller Mid-sized businesses tended to have less in-house tax expertise. This made it more difficult to keep accurate records and to check them effectively. Moreover, where there was mutual trust between businesses and agents, agents did not always complete full checks before filing returns, meaning some errors were missed.

Business growth

Businesses often made decisions without checking in with their agent first. These decisions sometimes had an unintended and unknown impact on their tax obligations.

Changing agent

Where there was a change in agent, complex business circumstances were less well known. This left businesses at a higher risk of non-compliance.

At each of these risk points the level of tax knowledge within the business, what process and systems a business has in place, cost-benefit and level of engagement with their agent were the reasons behind the heightened risk of non-compliance.

Some common ways of offsetting the risks were discussed by both businesses and agents:

agents stated that relationships were most effective where expectations were defined at the outset, ensuring businesses were fully aware of all their obligations and what was required to effectively manage them
businesses welcomed time and cost-effective solutions such as ‘pay as you call’ systems to reduce time needed for simpler queries
agents repeatedly stated the need for HMRC to consider staggering deadlines for Self Assessment returns across different businesses (they thought that this would help to reduce the high burden they face at key points in the year for returns)

2.5 Interactions with HMRC

Generally, businesses had lower levels of contact with HMRC than with their agents. For small businesses, contact was particularly limited. Instead, their agent tended to act as an intermediary. Mid-sized businesses had some contact with HMRC, although this was generally limited to problem resolution on internally managed tax obligations.

Agents tended to have considerably more contact with HMRC than their clients. This contact tended to be for problem resolution on behalf of their clients for issues such as incorrect late returns notices and correcting previously submitted returns. They less commonly contacted HMRC for complex advice, instead using their own professional networks.

2.6 Future role of agents

Generally, businesses wanted consistency in their relationship with their agent – there had often been no problems and therefore no reason for the relationship to need to change. Where changes to the relationship were envisioned, it tended to be to improve cost-effectiveness or to assist the business with implementing anticipated changes, such as a change to the business set up or the move to Making Tax Digital.

Question 3

3.       Introduction

Accepted Answer

3.1 Background

HMRC are committed to reducing the tax gap in the UK; this is the difference between the amount of tax paid to HMRC and the amount that should have been paid. There are numerous reasons why this gap arises:

some taxpayers make mistakes
some do not take enough care with their submissions
some engage in avoidance or evasion to reduce the amount they pay

Small and Mid-sized businesses are significant contributors to the tax gap, and so in this context are a clear priority for HMRC’s support and attention. The great majority of these businesses use one or more tax agents, mostly accountants, bookkeepers, or tax advisors, to assist them with their tax affairs. Agents therefore play a valuable role in supporting their clients to get their tax right. HMRC wishes to gain a greater understanding of how tax agents support small and Mid-sized businesses to comply with their tax obligations, and to explore the potential for HMRC working with and through agents to improve compliance further.

3.2 Research Aims

HMRC commissioned Kantar (Public Division) to conduct qualitative research to explore the relationships between businesses and agents, and how these change over time. Specifically, the research sought to:

examine the relationships and interactions between businesses and agents, focusing on the specific behaviours and actions taken throughout the tax year, the reasons behind these, and how they change as businesses develop and the surrounding context changes
identify the key points in the year and on the business development journey at which errors and other reasons for non-compliance occur or are at risk of occurring
determine how HMRC could intervene at these points or elsewhere with actions, support and other policies to reduce non-compliance and close the tax gap

3.3 Method

A qualitative in-depth study was conducted with small and Mid-sized businesses and agents to meet the aims of this research.

Between March and June 2019, 70 interviews were conducted with relevant individuals within businesses, primarily including Financial Directors and Chief Finance Officers, and tax agents. 48 interviews were conducted with businesses and 22 with tax agents. A mixed approach was taken; 27 were conducted face to face and 43 were via telephone. This approach ensured a greater geographically dispersed sample, and greater flexibility for participants. A full breakdown of the sample can be found in the technical appendix.

The research took a journey mapping approach to gain insight into the relationships, the detail of the interactions and the impact of these on behaviour and outcomes.

Question 4

4.      Defining the business-agent relationship

Accepted Answer

This section explores the relationship between businesses and agents. It examines the initial set up of the business-agent relationship, the level and type of support that is expected and how this differs by business size.

4.1 Trust in the business-agent relationship

Business-agent relationships were generally long-term and stable. Small businesses commonly discussed receiving recommendations for reliable agents at the inception of their business from previous colleagues or from someone working in a similar business to theirs. A smaller group of businesses had relationships that extended beyond their current business, having worked with their agent at a previous place of employment or through a previously owned company. Once relationships were established, they tended to be steady, with very few changing their agent.

“We’ve worked together for years, since 1976 in fact!”

Small business, Static, West Midlands

There was less clarity over the origins of the business-agent relationship in Mid-sized businesses. Financial Directors often lacked specific information about when and how the relationship had been initiated. This was because the business-agent relationship had often begun before the Financial Director had begun working with the business. It was suspected that these relationships were likely to have been formed through the business director’s own contacts. Again, these relationships remained largely ongoing and steady where there were no significant issues between the two parties.

Since the inception of the relationship, businesses of all sizes generally considered agents to be carrying out their roles well. For the most part, businesses felt that agents understood the role they wanted them to play and had a depth of understanding of the broader business context. They were, therefore, able to ensure tax compliance without repeatedly asking questions about the business context that were deemed to be unnecessary.

“They’re not asking stupid questions, that’s what it comes down to.”

Smaller Mid-sized business, Growing, South East

The consistency of the quality of practice and the level of business understanding displayed by agents led to businesses placing high levels of trust in them. Across business sizes, agents were referred to as ‘essential’ and often as a trusted advisor. Small businesses often went further to talk about their agent as a friend to the business and personally.

“I’ve had a good professional service for 20 years. We get on really well.”

Small business, Growing, East of England

In the case of some small businesses, errors had been made by the agent. These were largely errors that the business considered to be small and resolvable, for example an agent not recognising a case of human error when checking through records or missing a deadline. While in some cases this resulted in a breakdown of the relationship, where the relationship was particularly strong, businesses were reassured that the error was a one-off event and continued to work with and trust the agent.

The trust forged through consistent business-agent relationships was two-way. Agents also demonstrated trust in some of the businesses that they worked with, for example where businesses had consistently sent them correct information on time, and the agent had observed few incidences of non-compliance over long periods of time. In these cases, agents did acknowledge that they may be less thorough in chasing and checking records, heightening the risk of an error being missed. For example, one agent admitted to doing less complete checks before filing the returns of a client they had worked with for multiple decades because their accounts always looked very similar.

Agents articulated that there were other businesses they knew to be unreliable. They recognised the need to put more resource into chasing these businesses and spend more time on their returns.

“You can point out the impact to them and keep on reminding them and that’s all you can do.”

Agent, London

4.2 Setting expectations

Both businesses and agents wanted their expectations to be defined at the outset of the relationship to ensure a cohesive ongoing working relationship. These expectations tended to be set at an initial face to face meeting. While for small businesses, the meeting tended to involve the agent and the business owner, for Mid-sized businesses the agent generally met with the Financial Director or Chief Finance Officer.

Three common areas of discussion were identified:

the role of the agent
the level and type of interaction needed
compliance

Where each of these elements were covered effectively, relationships appeared to be more successful in the long-term.

The first area of discussion at the outset of the relationship was the role that the business wanted the agent to play. As agents were used to providing, and wanted to provide, bespoke support, this discussion was largely driven by the business. Businesses highlighted the tax regimes that they wanted the agent to be involved in, and the level of involvement that they wanted. This discussion often enabled the agent to gain a deeper understanding of the level of knowledge and capacity that the business had.

Secondly, expectations were set around the level and type of interaction that the business wanted from the agent. This was a discussion largely driven by the business to enable bespoke support to be provided by the agent. Where these conversations were most successful, agents were open to being flexible to the business’s ways of working.

“I needed them to understand the way things work around here and be ready for me to call them to make sure things are right.”

Larger Mid-sized business, Static, South East

The third of these elements was compliance. Where this conversation took place, it was largely driven by the agent. This enabled the agent to gauge how the business thought about tax and compliance (more specifically the extent to which they wanted to minimise the amount that they were paying) and ensure they were working with clients that aligned with their own attitudes towards tax.

Agents discussed turning away clients that were looking to use methods or schemes that would put them ‘on the edge’ of tax law. This was especially the case for smaller practices and agents who were close to retirement. Agents gave both practical and ethical reasons for turning these potential clients away. Where practical issues were the main rationale, agents were concerned about resourcing issues. Helping their clients to minimise their tax in these ways was considered to be resource intensive, and not worth the time that it would take to make possible. For others, morality played a more significant role in turning these clients away. These agents discussed the positive impacts that tax can have on public services, and their willingness to ensure that businesses were paying the correct amount of money to fund them. As such, they believed that businesses should be paying what they owe.

“I’m not at the point where I’m going to be working with clients like that [on the edge of compliance]. I don’t need it.”

Agent, West Midlands

While larger practices more openly discussed their role in enabling businesses to pay a lower amount of tax, they also suggested that they avoided businesses that wanted to be ‘on the edge’ of compliance.

Agents were unable to confirm whether these businesses went to other agents but speculated that they may use agents that were unaffiliated with a professional body. They thought that affiliated agents would generally want to avoid associations with such businesses to protect their professional reputation.

4.3 Content of business-agent interactions

Reactive versus proactive support

Contact between businesses and agents tended to be more frequent and intensive at the beginning of the relationship. This was largely to ensure that the agent had a full understanding of business-specific circumstances, needs and processes to facilitate more bespoke support.

The bespoke support that businesses were looking for included a combination of reactive and proactive support from their agent. Most of the support that businesses received from their agent was reactive, and businesses found this to be of significant value to them.

For small businesses, reactive support consisted of irregular and informal requests at low (or no) cost. Instead of having regular, scheduled meetings that were seen to be of little value, these businesses wanted to be walked through different tasks or have quick queries answered at a time that suited them. For the less engaged small businesses this tended to involve queries on simple data entry or checking deadlines. Where businesses were more engaged with managing their tax obligations, they valued being able to contact their agent for tailored advice on changes they had heard about in the tax system. For example, several small businesses had contacted their agent for further support with transitioning to Making Tax Digital including requests for software recommendations, or basic training.

“No, there’s no need for regular meetings. It would probably be a drain if we had to do that to be honest with you. There’s not really regular things that I need to say.”

Small business, Static, West Midlands

Mid-sized businesses also welcomed reactive support. The support needed was often more complex for these businesses. Smaller Mid-sized businesses (who tended to have lower levels of internal tax expertise) tended to approach agents when they were making complex business decisions that might impact on their tax obligations. An example of this type of decision could be buying or selling property. In these cases, they wanted reactive advice to their current circumstances. Larger Mid-sized businesses (who tended to have higher levels of internal tax expertise) more commonly made business decisions independently. They were often able to accurately work out the correct and compliant steps to take as well as the subsequent impact on their tax obligations. Some of these businesses saw value in contacting their agent as a ‘quick check’ that their decisions were correct, for them, their agent added a final layer of reassurance.

“We’ll have all the relevant discussions etcetera here and get everything in place and then it’ll just be a case of me letting them know what we’re doing and them saying yes that sounds right.”

Larger Mid-sized business, Growing, South East

Agents were positive about providing reactive support to businesses. They were understanding of cost constraints and wanted to provide a service that fit the bespoke needs of the business. They welcomed informal contact from businesses and were generally set up to respond to requests for support in this way.

Businesses also received some proactive support from their agents. Responses to proactive support were more mixed, dependent on the form it took. Businesses were positive where agents sent unprompted confirmations of their actions and where they sent reminders.

Across business sizes, confirmation of the actions that agents had taken were welcomed. This provided a paper trail for businesses to refer to if compliance was called into question, facilitating a feeling of reassurance. Some went further to discuss the positive implications that this had on the business, feeling reassured meant that they felt better able to focus on the day to day running of the business.

Proactive reminders in advance of submission deadlines across tax regimes were also valued, particularly by smaller businesses. These businesses felt reassured that reminders would offset the risk of missing deadlines at no additional cost. Larger Mid-sized businesses were less commonly reliant on reminders.

However, where the content of the contact was less specifically targeted at the business, proactive support was perceived to be excessive and not of good value. An example of this was where agents provided newsletters. Newsletters were seen to carry too much general information and businesses were generally unable to distinguish which of the articles carried information that was specifically relevant to them. Businesses reported having little time available to engage in a meaningful way with the content, particularly small businesses with fewer staff. For example, one business discussed how they had no engagement with the newsletter because they found the content too difficult to engage with, yet the agent would still send them regularly. Instead of receiving these newsletters, businesses expressed a preference for targeted communications with business-specific information about how changes in the tax landscape might impact them.

“I get newsletter updates, not that I understand what I’m reading…they just include what’s happening in the world of taxation and like I say it’s beyond me.”

Small business, Static, East of England

Smaller businesses were also reluctant to accept additional meetings without a specific purpose that were occasionally offered proactively by agents. The cost of attending these meetings was considered to be more substantial than any benefit that would be observed. Instead, they expressed a preference for targeted meetings held in a cost-effective format, for example over the phone.

Agents did recognise the need for proactive support for businesses in some circumstances. This was particularly important for small businesses that were less aware of their obligations and how to manage them. Agents highlighted that some small businesses consistently missed, or nearly missed, deadlines and were less able to keep records of their finances. As such, this group needed more proactive support and guidance from their agent to ensure they met their obligations.

Small business interaction with agents

Small businesses tended to have simple tax obligations, but a lower capacity and capability to manage these. As a result, they were heavily reliant on their agents. Three key ways in which these businesses used their agent emerged:

outsourcing the majority, if not all their obligations
quick, informal calls
spreadsheets or software provided by the agent

Where businesses lacked confidence in managing their tax obligations across a range of tax regimes including PAYE, VAT and SA they outsourced the work (for example, completion of returns) involved to an agent.

Where the business-agent relationship was stronger, small businesses preferred irregular and informal calls with their agents as and when issues arose.

The smallest of these businesses commonly had bespoke data entry spreadsheets that had been created by the agent to ensure that business felt able to work with them. Other small businesses were using software recommended by their agent to facilitate more accurate record keeping.

There were two key drivers to small businesses adopting these behaviours. The first was the efficacy of small businesses. Small businesses generally had low levels of knowledge of their tax obligations and very few had a dedicated finance team. As a result, they were often unaware of how to act on simple obligations or questions and so heavily relied on agents to be able to respond in a quick and informal manner. The lack of knowledge reinforced a sense of concern about making mistakes among this audience and so these businesses generally elected to outsource most of their obligations to their agent.

The second driver was cost benefit. Small businesses generally had quite simple obligations that needed very few discussions for the agent to understand. Because of this simplicity, the type of further advice that they needed was not regular, instead tending to be ad-hoc and infrequent in nature. As such, small businesses did not want to pay for regular meetings that were unlikely to have an equivalent benefit for them.

Agents that worked with small businesses generally mirrored their preferred ways of working. Firstly, agents welcomed the opportunity to manage the majority, if not all, of a business’s obligations. It provided them with a greater level of oversight of business-specific circumstances enabling them to offer more effective advice. Secondly, agents generally considered small business’s tax obligations to be simple. They therefore recognised that regular meetings were unnecessary, instead they just needed to know when circumstances changed through informal communications. Finally, facilitating a business to work with spreadsheets and software that was aligned with their own needs also made checking accounts and filing returns simpler.

Agents also generally stated a preference for offering bespoke support to what the business needed. They were often flexible in ways of working and so were open to adaptations of the above.

Mid-sized businesses’ interactions with agents

Mid-sized businesses used their agents in different ways depending on the level of internal expertise in the business.

Smaller Mid-sized businesses tended to have lower levels of internal tax expertise. These businesses used their agents to assist on a range of tax obligations and to complete standard checks on their accounts to ensure data had been entered correctly and accurately. The use of their agent did, however, often extend beyond simple tax purposes. Instead, the relationship was more of a partnership. Tax agents were often asked for advice on broader non-tax issues, and some were involved in ongoing business planning. For example, one business discussed how their agent participated in quarterly board meetings. As these businesses lack extensive internal expertise, they welcomed the additional advice and reassurance that their agent provided them.

“I attend the board meeting every month where we discuss a huge range of things. I think they just like to have someone there to chip in as and when there’s implications on tax or other financial issues.’

Agent, South East

Agents working with this size of business recognised the need to have a more ongoing, in-depth involvement. The queries directed at agents were often more complex and required business-specific knowledge. As such, agents generally mirrored smaller Mid-sized business’s preference in their ways of working.

Larger Mid-sized businesses commonly had higher levels of internal expertise. For some this involved numerous dedicated finance teams, each with extensive knowledge and experience. For these businesses, the business-agent relationship was much less of a partnership. Internal financial teams were capable of actioning much of the work without agent input.

Despite this, agents were often still involved in Corporation Tax computations and may complete simple, final checks after more rigorous internal checks were complete. The main driver to this type of agent use was the importance placed on rigorous processes. These businesses had high levels of professionalism and wanted to take every step possible to ensure compliance. As a result, having a final external check was seen to be part of a broader meticulous process.

For other larger Mid-sized businesses, involving an agent in managing tax obligations was a cost-benefit decision. Internal expertise was seen to be of more value when focused on more strategic decisions for the business. For example, one Financial Director discussed how he valued being able to spend more time looking for future acquisitions instead of being more heavily involved in Corporation Tax computations. Bringing Corporation Tax in house would take up capacity that could be used elsewhere.

“I mean we definitely could handle it [Corporation Tax], but there are more valuable things I could be doing.”

Larger Mid-sized business, Static, South East

A small number of businesses still involved an agent in their tax affairs simply because of habit. Some Financial Directors had come into the business with Corporation Tax already being managed externally. Where this was working well, they often saw no reason to disrupt ways of working.

4.4 Changing agents

As previously noted, the business-agent relationship was generally long-term and steady. Businesses very rarely made the decision to change agent. Where this had happened, it tended to be for one of three core reasons:

a breakdown in trust between the business and agent
significant business growth
significant agent growth

The first driver to changing agent was where there had been a breakdown in trust between the two parties. For some, the loss of trust came where the expectations set at the outset of the relationship had not been met. This could involve lower levels of proactive contact from the agent than the business expected, resulting in concerns that the business may be at greater risk of non-compliance.

“He was slow, and never on our case… we nearly missed a deadline.”

Smaller Mid-sized business, Static, West Midlands

For a small number of businesses, the breakdown in trust went a step further and a case of non-compliance resulted in a fine. After receiving a fine, some businesses felt that their agent was no longer capable of providing the service they were paying for and so they looked elsewhere for an alternative agent.

The second driver to changing agent was where there was significant growth within the business. Small agents discussed occasions where small businesses they worked with had observed significant growth. They were able to recognise that they were no longer best placed to meet the needs of the business, who required a greater level of consultancy, and often had more complex obligations as they grew.

“I had one business that got a really big contract and just grew too quickly for me to handle.”

Agent, South East

Businesses also recognised the need for a change in agent as they grew. Numerous growing businesses highlighted their need for more formal and complex advice, and therefore an agent with greater capacity and specialised knowledge. These businesses also discussed the evolving needs of their clients and stakeholders. Larger Mid-sized businesses alluded to the idea that their clients and stakeholders would feel more reassured if they were using a larger agent with a well-known reputation.

The third driver was significant growth in the size of the agent. One business highlighted the change in the nature of their relationship with their agent when the agent grew substantially over a short period of time. Where they had previously felt well-catered for by their agent, they no longer felt valued as a client. Again, this represents a breakdown in expectations set at the start of the relationship.

“When they grew I felt like a small fish in a big sea… I wanted to be a big fish in a small sea.”

Smaller Mid-sized business, Static, Scotland

Question 5

5.      Attitudes to compliance

Accepted Answer

This section explores business and agent attitudes to compliance. It looks at where there can be weaknesses in compliance as well as what the key drivers to compliance are. It also provides detail on agents’ attitudes to non-compliant clients and the reasons as to how non-compliance may be occurring.

5.1 Business attitudes to compliance

Across the business sizes, compliance was of the upmost importance. Three key reasons were identified as motivations to be compliant, transactional, moral, and emotional.

Among Mid-sized businesses and confident, experienced smaller businesses, compliance was seen in a ‘matter of fact’, transactional way. For these businesses, compliance was an inherent part of running a successful business, building credibility, and upholding the responsibility the business had to its employees and stakeholders. It was recognised that non-compliance meant the possibility of an investigation which would be an unwelcome disruption, one which could be damaging to their reputation and operations. These businesses also tended to keep a close eye on their figures (to monitor profit and loss) and so any irregular changes in their figures were quickly identified and spotted.

“It’s what we do. If we’re not compliant then we’re not doing our job.”

Smaller Mid-sized business, Growing, South East

Morality was a motivation which was seen across all business sizes. The recognition of the importance of paying taxes to fund public services and respect for the law underpinned the attitude of participants from all business sizes. For these participants, being compliant was an integral part of running a successful business and ‘the right thing to do’.

“If there weren’t taxes, there wouldn’t be public services. It’s just what we’ve all got to do isn’t it.”

Smaller Mid-sized business, Static, Wales

Emotion was a driver to be compliant for smaller, new businesses and growing businesses which are adapting to new requirements. Those businesses which had limited understanding of how tax works could be fearful of unwittingly making mistakes and being punished by HMRC. To them, HMRC was perceived to be an unforgiving government power with the potential to enforce consequences such as penalties, fines and even prison.

“I don’t want to go to prison, you hear too many horror stories about people getting fined or going to prison - it’s never worth it.”

Small business, Growing, South West

Smaller businesses also tended to have a higher emotional investment in their business. The prospect of their business being investigated or penalised was therefore an upsetting and affecting one, which they strived to avoid.

“In the eyes of the law if there’s a case against my company, there would be a case against me.”

Small business, Static, South West

5.2 Agent attitudes to compliance

Compliance was central to the role of the agent and supporting compliant behaviour was key. For agents there were two key drivers behind this attitude: their professional reputation and morality.

Firstly, agents considered compliance to be of importance because of their professional reputation. Agents recognised that they were relied upon and hired by clients largely for their expertise on tax and compliance. If they were to submit accounts with errors, it could damage their reputation with current clients, potential clients, and impact upon their business. There was also acknowledgement from affiliated agents that they could be penalised by their professional body, which similarly could impact upon their business.

“There shouldn’t be the opportunity for a big error to arise if you’re doing proper due diligence.”

Agent, North of England

Another driver was morality and seeing compliance as ‘the right thing’ to do. For these agents, being compliant was embedded within their practice and was a fundamental part of their attitude. They had a strong ethical code by which they ensured their clients were paying the ‘right’ amount of tax to contribute appropriately to public services and society. This driver was determined by the agent’s personality and was noted in both affiliated and non-affiliated agents.

“The majority of my clients, we’ve known each other for a long time, and we understand each other. I want to do the right thing, they do too.”

Agent, South East

Ultimately, agents were confident that they were doing all they could to support their clients to be compliant. For small and newer businesses, they were on hand to answer any questions and to advise on trivial questions if required. They were ensuring their clients were prepared and supported for changes such as Making Tax Digital. Additionally, when they spotted mistakes, for example, if a client had claimed VAT or expenses ineligibly, they took the opportunity to educate their client on what the mistake was and how it should be avoided in the future. These kinds of interventions and support were most commonly seen amongst small and newer businesses, as larger businesses tended to have higher levels of confidence and experience.

“They [the business] are pretty good as over the years they have been trained.”

Agent, South East

With businesses of all sizes, agents were preparing and checking accounts before their submission and where required, offering bespoke services and advice on how to be tax efficient, dependent upon a business’s needs. For those businesses who wanted to be as tax efficient as possible, agents were able to advise them on how to achieve this as best as possible, within the limitations of the law.

“One seeks to get the best tax position for them both in terms of the correct amount of tax they pay and the lowest amount.”

Agent, South East

There was consistency in the attitude held by agents towards non-compliant clients and clients who were deemed to be ‘on the edge’ of non-compliance. Agents identified these types of clients by the questions asked at the set-up stage (where, for example, they established their approach to record keeping) and when they prepared their accounts for the first time. Risky clients were not seen as worth the effort required to ensure their compliance.

“I’m not interested in taking on clients who want to be on ‘the edge’. To me it’s just not worth the time it would take, and it just wouldn’t feel right.”

Agent, South East

To manage risky clients, agents tended to have certain requirements, (such as ensuring all cash flow is managed and reconciled by the agent or that the business only used petty cash, rather than large amounts), so their compliance can be closely monitored, or they may be refused as a client.

“Cash is easy to hide which is why we try and steer our clients away from cash.”

Agent, South East

Despite all the steps taken by agents to ensure compliance, there was recognition that non-compliance did still occur. Agents theorised about the reasons non-compliance occurs and suggested the following:

cash businesses may be responsible for non-compliance due to cash being harder to hold accountable and therefore easier not to declare
as some agents lack overarching visibility of the whole tax management process, such as bookkeeping and record keeping, errors may occur which an agent never has sight of
the practices of other agents may be less rigorous and their attitude less compliant-focused than those within the sample
agents which are not members of professional bodies and are therefore non-affiliated are possibly less risk adverse than affiliated agents because the consequences for poor accounting are less damaging to them

5.3 Reliance on others for compliance

Businesses recognised that they were ultimately responsible for ensuring they were compliant as they were responsible for formally ‘signing off’ on accounts and were therefore legally accountable. However, despite this acknowledgement of responsibility, in practice, businesses could rely heavily on others to ensure that compliance was being met. This reliance manifested itself in two key routes: reliance on agents, and reliance on others in the business chain including internal staff.

Small businesses tended to be time poor and lacking in tax understanding and were heavily reliant upon their agent to ensure their returns were in order. This reliance also stemmed from an expectation that as tax experts, agents may be able to spot things which they had missed. These expectations were felt most amongst those businesses who were using well known and affiliated agents who businesses believed had earned their good reputations by the quality of their work.

“[My agent] keeps me legal and tells me what I’ve got to pay, and I’ll pay the cheques. I rely on the man totally.”

Small business, Growing, South East

Businesses also relied on others in the chain, such as bookkeepers and administrative staff, to be compliant. Where these additional individuals were being used, the business generally assumed and trusted that the data was being entered accurately and competently. In some circumstances, agents also had limited oversight of the whole process. Where record keeping was the responsibility of the bookkeeper or administrative staff member, agents heavily relied on them to enter the data correctly. They had low capacity to identify missing entries, or data entry errors as they were unable to see where the data had come from. Larger businesses which did not have an internal team (or were understaffed) were also more at risk of missing complex errors due to resource issues and agents doing ‘spot checks’ rather than comprehensive reviews.

This reliance on internal staff was not only related to administrative and bookkeeping tasks, it also extended to financial processes. Mid-sized businesses tended to rely upon internal staff to ensure tax compliance for tax obligations such as VAT and PAYE. Spotting internal mistakes was most effective in businesses where there were extensive processes and checks built in. Where these processes were more ‘light touch’, and the expectation was that processes worked as they should there was a greater margin for errors to be missed.

“We’ve got rigour in our processes.”

Smaller Mid-sized business, Growing, South East

Question 6

6.      Recognising and managing risk points for non-compliance

Accepted Answer

This section identifies the points at which businesses are most at risk of tax non-compliance. It explores why non-compliance is at higher risk at each of these points, highlighting tax knowledge, cost-benefit, business norms and the level of agent engagement as the key behavioural reasons behind this.

6.1 Recognising cases of non-compliance

Businesses often found it difficult to recall and identify specific incidences of non-compliance within their own business when initially asked. Only on further discussion, when talking more broadly about their business, were businesses able to recognise where a case of non-compliance had occurred.

Where cases of non-compliance had occurred, businesses of all sizes tended to refer to them as ‘minor’. They were commonly the result of low levels of understanding (for example, claiming VAT incorrectly) or caused by human error (for example, through accidentally entering incorrect figures during record keeping processes).

In small and smaller Mid-sized businesses, the agent more commonly recognised errors made when they were checking through records. However, where there were higher levels of internal expertise in larger Mid-sized businesses cases of non-compliance were often recognised internally before records reached the final check with the agent. Only in a small number of very complex cases was the agent involved in picking up on the error for these businesses.

Where non-compliance was recognised, it was common for agents to send records back to the business to rectify. The amends were seen to be simple enough for businesses to be able to do themselves without incurring further costs from the agent. However, agents would amend records for businesses with the lowest levels of knowledge (often very small businesses and Mid-sized businesses with complex or long-term problems). For those with the lowest levels of tax knowledge, agents amended records to save the business time and worry over problems with a very quick and simple resolution. In the case of complex or long-term problems, agents amended records themselves or with the business as expertise beyond that of the business was often needed. In both of these instances, agents would still inform businesses of the amends that had been made to try to avoid repetition of errors.

Where errors were resolved before reaching HMRC, businesses no longer considered them to be incidences of non-compliance. As a result, businesses tended to forget the error had occurred and so recall was difficult.

6.2 High risk non-compliance points

Across business sizes, there were 4 common points at which businesses were at higher risk of non-compliance. These were identified as:

business set-up; the point at which contact was initiated with the agent and decisions were made about the role that they would take and the tax regimes that they would be involved in
regular annual / quarterly returns; including VAT and Corporation Tax returns that were completed by the business, agent or a combination of the two on a regular basis
business growth; an increase in turnover and the impact that this had on their tax obligations
changes in agent; where there had been a breakdown in trust, or substantial growth observed, some businesses changed agent

Business growth also often resulted in businesses taking different actions such as taking on a new employee, investing in resources or looking for acquisitions. The transition period when changing agent was a risk point to businesses and agents.

Through analysis of these 4 common high-risk points, we identified 4 common reasons for non-compliance: tax knowledge, cost-benefits, business norms and level of engagement with agents. At each of the stages, all or some of these reasons played a role in shaping the risk of non-compliance.

Knowledge of how to meet tax obligations: this was determined by the extent to which the business was aware of their tax obligations at each point in the journey and as the business evolved over time.

Business norms: this involved the ways in which a business was used to running on a day-to-day basis, including record keeping practices and how they were used to interacting with external agents.

Cost-benefit: the extent to which a business was at risk was determined by the resources they had available, and how they prioritised what they did have available.

The level of engagement: this involved the strength and type of relationship and the level of trust between the business and the agent.

This section will explore each of the ‘risk points’ in more detail. At each risk point, the reasons for non-compliance will be used to determine what the risk looks like, which businesses are most at risk and steps that could be taken to offset the extent of the risk.

Business set-up

Knowledge of tax management affected how at risk a business was of non-compliance when first setting up the business. While previous business owners felt better-informed, first-time business owners suggested that their knowledge levels were particularly low. They discussed that they did not always know what questions they should be asking their agent at the outset of the relationship to ensure that they were able to effectively manage and meet their tax obligations.

“I didn’t understand tax affairs and I didn’t know what I needed to know.”

Small business, Growing, South West

These businesses would have welcomed further direction from agents during initial discussions, as seen in case study 1.

Case study 1 of a small but growing catering business.

They were a relatively new business with low levels of awareness about their obligations and said, “I wasn’t really sure what I was supposed to be doing”. The business reported engaging with an agent at set up because ‘it’s what you do’ and because of low levels of internal tax knowledge. The business was looking for cost effective engagement with a tax agent. The business directed the agent to manage CT but elected to manage PAYE internally. This was a possible point of intervention: the business expected the agent to ensure they were fully aware of all obligations at the outset to make informed decisions. However, the business’s low awareness of PAYE obligations led to a missed deadline. The business also had missing receipts in its CT return which the agent had to chase. This was another possible point of intervention; the business would have welcomed a culture of check-ins to ensure clarity over processes.

More confidence was seen among businesses with agents that had not assumed a base level of tax knowledge. Agents with closer relationships with their clients also recognised the need to provide greater level of direction to businesses at the outset. They highlighted that more could be done to ensure that businesses were aware of all their obligations and what would be involved in the management of each, as well as outlining each of the services on offer that would be suitable for the business in question.

Cost-benefit decisions also determined the risk of non-compliance at business set-up. In the early stages of business development, available funds and resources were generally limited and as a result, businesses were commonly looking to make cost savings where possible. Therefore, some businesses reported using their agent in a more scaled back way to save on cost. For example, some businesses reported that they were doing their own bookkeeping despite having limited knowledge of the processes involved. These businesses suggested that more support would have been preferential if it had been financially possible.

At the early stages in their development, businesses welcomed steps that agents took to facilitate greater cost efficiency while upskilling them on their limited tax knowledge. Several businesses used the example of an action sheet with common questions for the specific business type. This enabled businesses to have a ‘quick check’ of simple issues without having to incur the cost of contacting their agent repeatedly (as seen in case study 2).

Case study 2 of a small, growing education business.

This was a new business with limited funds available for engaging with a tax agent. The business involved overseas working and at set up was looking for cost effective engagement with a tax agent. The business elected to do day-to-day accounting internally and provided accounts to the agent for tax returns. This was a point of intervention: the agent correctly recognised the need to support the business in accurate accounting. The agent provided a business-specific checklist outlining what information was needed from the business. The business felt supported at a lower cost and kept accurate accounts. They said, “It means we get things right first time which worked for everyone!”

The level of engagement between the business and agent at this stage also contributed to how ‘at-risk’ a business was of non-compliance. Where the relationship existed before the beginning of the business, there tended to be greater agent engagement at the outset. This often consisted of informal, low-cost support which was highly beneficial to the business. Where there was no prior relationship, the contact with the agent tended to be more formal at the outset and came at a greater expense.

Business-agent relationships appeared most successful where agents invested lower-cost time and engagement up front in getting to know the business’s specific circumstances. This was in some cases reported to be mutually beneficial in the longer-term as a higher level of understanding resulted in a reduced need for contact further along in the business’s journey.

Business norms were found to be a lower risk at business set up, largely because they were unlikely to have been consolidated at this point. This gave the agent greater scope to shape the type and quality of interactions that they would like to have with the business in question. Agents had more room to shape these relationships for Mid-sized businesses, where they could afford to invest in time upfront.

Regular returns

Regular annual and quarterly returns were also a key point at which businesses were at risk of non-compliance. Cases of non-compliance that occurred during the process of filing returns often consisted of human error mistakes, such as accidentally entering incorrect figures, or were the result of a lack of understanding of elements of the tax landscape, for example claiming VAT where not eligible. Some small and static businesses with low levels of digital literacy were concerned about transitioning to Making Tax Digital without further support from their agents, which they did not feel was within their budget.

Knowledge of tax unsurprisingly played a key role in determining the extent to which a business was at risk. There was a higher risk where businesses had less in-house resource and expertise, this tended to be small and smaller Mid-sized businesses who did not have an extended internal finance team. The lower levels of expertise within these businesses meant they found it more difficult to keep accurate records, and to effectively check their records independently. As such, more errors were present when returns were sent to their agent to check.

These businesses also tended to have lower levels of digital expertise internally. As such, some kept paper records or used basic spreadsheets put together by their agent, whereas others relied on their agents to keep records for them. These, often small and static businesses, expressed some anxiety about their ability to comply with changes to the tax system following the transition to Making Tax Digital. Agents confirmed this view, suggesting that many of the small, static businesses they worked with could find it difficult to adapt to using Making Tax Digital aligned software without their support and may find new processes difficult where they had low levels of software expertise.

“A lot of my clients are going to need a lot more support…they’ll struggle to use it [aligned software]”

Agent, Wales

More proactive agents were taking steps to offset the risk faced by small static businesses in making the transition to Making Tax Digital. These agents had worked with businesses to build in additional time for data entry checks in advance of deadlines. This enabled agents to spend more time locating errors that had been made and left more time for feedback and training where errors had occurred. Businesses reported that while they remained concerned, the additional time and support through the process offset some of their worries about the upcoming changes.

Small and smaller Mid-sized businesses also had low levels of oversight of the evolving tax landscape. Where smaller and more niche changes were made, the businesses were often unaware and were completely reliant on their agent to notify them and ensure they were being applied accurately. For example, one agent discussed the evolving complexity of Self Assessment legislation, and how businesses were struggling to keep on top of the changes.

“It really does make life quite difficult for them when it changes at this pace, slow down. Bring the pace of change within a structured five-year routine.”

Agent, South East

As these businesses tended to have less resource and knowledge and were not planning to change the level of reliance placed on their agent, both businesses and agents saw this as an ongoing issue that would be difficult to overcome.

Business norms also contributed to how at risk a business was during regular returns. Record keeping tended to be ingrained into a business’s way of working, whether this be through simply collecting receipts or through advanced software. Where the norm was to keep paper records or simple spreadsheets (more commonly in small businesses) the risk of inaccuracies was higher.

“‘It can be harder to immediately see where the issue lies when it’s not automatically flagged up [by software]”

Agent, London

“I don’t see why I should change…there’s nothing wrong with the way I’m doing things”

Small business, Static, West Midlands

Business norms around record keeping were less of a concern for both smaller and larger Mid-sized businesses where they were more likely to have more advanced software.

Agents suggested that providing training on simple data entry for small static businesses who were struggling with record keeping practices would likely facilitate greater levels of compliance. They did, however, indicate that this would be a difficult sell to time poor businesses, some of whom lacked interest in improving their knowledge of tax processes and systems.

Small businesses suggested that any changes needed to their ways of working needed to be more digestible for them to engage with, and therefore ultimately be compliant with. To offset feelings of being overwhelmed, businesses wanted their agents to introduce changes such as Making Tax Digital to them in a more gradual way. Agents were considered the best avenue to receive the information as these businesses felt more confident in interacting with them than they did with HMRC.

Cost-benefit estimations also had substantial implications on the risk of non-compliance when completing regular returns. Some businesses elected to have agents managing just some of their tax obligations, rather than them all, to save cost. This was also seen in the transition to Making Tax Digital for VAT. Some small businesses were reluctant to pay their agent further money to train them on new software or for the agent to complete their returns for them, despite low levels of expertise with the software. These businesses were optimistic but uncertain about their ability to navigate the changing tax landscape, so they opted to complete returns themselves, acknowledging that this put them at a higher risk of completing their return inaccurately. Completing returns in-house had a limited impact on larger, more knowledgeable businesses; however, those with lower levels of knowledge often struggled to complete their returns accurately.

Small businesses suggested that agents could better assist on tax obligations that businesses were managing internally through advising upfront on the tax obligations where they feel their support would be most useful. They reported that this conversation should ideally outline what is required for each tax regime and advise which of these would likely need a greater depth of tax expertise.

There were further steps that businesses identified that they thought could offset concerns about non-compliance, while keeping costs minimal. They suggested that agents could better direct them towards cost-effective training materials. Online tutorials were suggested by some, with others highlighting the need for paper checklists and instructions for the least digitally literate. Businesses wanted these materials to be targeted by size of business to ensure that the correct amount of information was made available, and the language was tailored to fit with their level of digital literacy.

Finally, the level of engagement between the agent and business also played a significant role in determining the level of risk of non-compliance. Agents had commonly worked with businesses for long periods of time. Where the business was static, was found to demonstrate consistency in the information they previously provided, and had rarely made errors in the past, agents admitted to being less rigorous in their checking processes. In some cases, this had led to errors being missed and instead being picked up as cases of non-compliance by HMRC. These agents trusted businesses to get things right first time, where they did not always have the expertise to do so. For example, one business incorrectly reported an offshore bond as an onshore bond in a Corporation Tax return. Because the agent did a quick, simple check and did not follow up with questions, the error was missed and resulted in a fine from HMRC.

“I’m not going to ask to see every single piece of paper if they’ve already done the exercise and feel they’ve done it competently.”

Agent, South East

Businesses were not the only people that agents put their trust in. They also highlighted an unavoidable reliance on others in the chain in some circumstances. The most common of these was the reliance on bookkeepers. This added further layers to the tax return process and meant that agents often lacked complete oversight of the returns process. As such, they could never be completely certain that no errors had been made.

Agents felt that to offset this risk, a more joined up approach was needed between businesses, bookkeepers, and the agent themselves. They were unable to specifically articulate how this could be formed but highlighted it as something that HMRC could encourage and promote.

Agents also highlighted some limitations that came from businesses needing to submit Self Assessment returns at the same time of the year where relevant. Despite continually engaging with businesses and advising them to provide the relevant information well in advance of the deadline, agents found that businesses would commonly leave this until the last minute. This often resulted in a bottleneck for the agent, where they became under pressure to complete returns on time and avoid fines for their clients. This sometimes led to agents doing quicker, less thorough checks than they would like, meaning some errors went unnoticed. For some smaller agents, this time pressure also led to other problems. A small number admitted to not filing returns on time, or completely missing a business’ return, based on their high workload. In these cases, their client received a fine which was sometimes paid by the agent.

To overcome this bottlenecking issue, agents repeatedly suggested that HMRC could implement the option for Self Assessment tax returns to be filed at different times of the year. They felt that this would go some way to offset the high burden they face at certain times of the year.

Case study 3 of a small agent doing less thorough checks on reliable businesses.

The agent had a well-established relationship with a stable, small business. The agent checked accounts and completed returns across tax streams. They did a simple check, assuming the client was correct based on prior interactions. This was a possible point of intervention: the agent wanted a greater spread of time to complete returns to enable thorough checks. HMRC picked up an error. The business had reported an offshore bond as an onshore bond resulting in an incorrect tax calculation. The agent said “This is a long-standing client that has always done things to the book. If I’m honest about it, I should’ve asked more questions”.

Case study 4 of a small, growing management business completing their own tax returns for obligations that they have a low awareness of.

The agent was not involved in the business’ VAT return to save on cost. This was a possible point of intervention: agents could provide a simple checklist for low-cost support. The business included figures on overseas transactions when not needed. This was another possible point of intervention – businesses wanted the option of calling an agent for a ‘quick check’ on new types of transaction. The return was rejected by HMRC, and the business was asked to call HMRC to rectify the issue. The business said, “I hadn’t had any information to suggest that the transactions shouldn’t be included”.

Business growth

Business growth was also a key risk point for cases of non-compliance. This looked different across business sizes. For small businesses, growth often meant taking on an additional employee or buying additional resources. For Mid-sized businesses (both smaller and larger), growth often involved starting to acquire companies or beginning to make more complex property decisions.

Knowledge of how growth impacted on tax obligations was generally low amongst small businesses. These businesses tended not to have internal expertise and so lacked awareness on whether there would be any implications on their tax obligations and, if there were, what these might be.

Smaller Mid-sized businesses were also at risk of non-compliance at points of business growth. For this group, it was commonly because they thought they knew what the tax implications of business decisions would be. However, in some cases, these businesses underestimated the complexity of the impact of the business growth. They often lacked the internal expertise to be able to understand the impact of the change on their tax obligations. Examples of this involved complex property taxes that were beyond the business’s level of understanding.

Larger Mid-sized businesses tended to have a high level of internal expertise, sometimes having multiple finance teams. As such, they were generally able to understand the implications of business growth and navigate the ways in which their obligations may change, or whether certain conditions would apply to them.

Where it was the business norm not to ask for external advice or guidance, the risk of non-compliance was further exacerbated. Among small, previously static businesses this was often the case. These businesses tended to have very consistent, simple transactions and so they rarely needed to seek external input. Instead, they followed the same simple processes each year. Where a change was observed, these businesses commonly adopted a business-as-usual approach, without checking if their obligations would have changed as a result. Some smaller Mid-sized businesses also considered it the norm to make decisions independently of their agent. As previously discussed, this group commonly thought they understood the implications of their decisions. As such, they did not involve their agent where needed.

“There’s some businesses that will just go ahead and make a decision and all it would’ve taken was a single call to us and we’d say no don’t do it like that.”

Agent, West Midlands

Both small businesses and smaller Mid-sized businesses that were not in the habit of routinely checking decisions with their agent suggested that agents needed to further reinforce their role as trusted advisor. For them, increased informal communication would make contacting their agent a more consolidated part of their routine when decisions about business growth needed to be made. They suggested that this could be achieved through agents actively initiating informal contact, for example through check in phone calls. Normalising this quick contact may encourage further business engagement with their agent at these crucial points.

Not seeking agent advice was a more conscious cost-benefit decision for some small businesses where funds were limited. These businesses were less likely to involve agents in every decision made, instead only bringing them in for advice where they felt it was completely necessary. As a result, where businesses did not pay for the advice of their agent, errors were sometimes made and not picked up on before reaching HMRC. An example of this occurred where one small business was growing and needed to purchase an additional vehicle. They intended on using it for business and personal use. The business deducted monthly expenses where they should not have. This was later queried and had to be resolved with the help of the agent.

A range of methods of offsetting this issue were suggested by both businesses and agents. In the simplest form, businesses welcomed a ‘matrix’ of common questions that they could refer that outlined the tax implications of common issues or changes that they might face. This would ensure that simple questions could be dealt with internally, and therefore with no cost. Some agents had also seen positive results from a new ‘pay as you call’ system whereby businesses could have quick, informal conversations with their agent without being charged for a full consultation.

The level of engagement between businesses and agents determined the extent to which participants were open to more ongoing communication at points of business growth. Where businesses already thought of their relationship as more of a partnership, or where they considered their agent to be a trusted advisor, businesses were more open to developing the way in which they interacted with their agent.

Case study 5 of a Mid-sized agent working with a business uncertain of whether the option to tax was in place after business growth.

It was a Mid-sized business with an ongoing but light-touch relationship with their agent. They were selling commercial and residential property without agent advice. The tax arrangements were complex as properties sold as a going concern (Transfer As Going Concern or TAGC) are not subject to VAT. The elements that make up a TAGC are that the assets being sold must be part of a “business” as a “going concern”. These assets must be used by the buyer with the intention of carrying on the same business (but this does not have to be an identical business) to the seller. The business sold property thinking no VAT applied because of TAGC but TAGC was not applicable in the circumstances. This was another possible point of intervention: the business wanted the agent to introduce cost effective techniques for understanding common but complex issues. The business received a fine from HMRC. The business and agent then worked towards a more collaborative relationship using cost effective techniques. The agent said “It stops them [the business] coming with the same question every time. We’d find ourselves taking up a lot of time and not charging for it”.

Case study 6 of a Mid-sized agent lacking oversight of the whole process of the business they were working with.

The business became VAT registered, agreed to prepare their account, and send it to the agent to file without additional checks. This was a possible point of intervention: the agent suggested they could have been more encouraging of higher levels of support for complex obligations. The business had partial exemption on property but had been recovering tax on the whole thing. HMRC picked up on the error and issued a fine. The agent is now involved in backdated checks and a more ongoing and open dialogue. The agent said, “They realise what they’ve done wrong now and allowed us to be more involved in a really positive way”.

Changes in agent

There were low incidences of businesses changing agents; however, where they did it tended to be a result of a breakdown in trust, significant business growth or significant agent growth. Where a business elected to change their agent, there was a risk of non-compliance.

The knowledge of business-specific circumstances held by the new agent at a point of change was a risk to compliance. A change in agent commonly occurred at turbulent times for businesses, such as where a significant error had been made or where they were seeing significant growth or drop in profits. As such, businesses were less able to define and explain their circumstances in a comprehensive way, making it difficult for agents to understand their position. This was found to be more complex for Mid-sized businesses, particularly larger Mid-sized businesses. Their set up and circumstances tended to be more complex and require a greater level of historical knowledge to understand their current position.

Business norms, including record keeping and timeliness, also needed to be fully understood by the agent for interactions to be appropriately shaped. Agents found this particularly difficult for businesses at each end of the spectrum in terms of size. Small businesses had fewer formalised processes, and as such found it more difficult to explain their ways of working to their agent at the outset. For larger Mid-sized businesses, the processes were in place, but were far more complex. As such, more time needed to be invested up front to understand how the business worked.

Cost-benefit decisions exacerbated these concerns, particularly among smaller businesses. Changes in agent normally came at turbulent time for the business (after an error or significant growth) and as such businesses were often time poor. They therefore found it difficult to find the time to invest in extensive communications with an agent. In some cases, holding these concerns about upfront costs led to a reduced amount of time spent defining the relationship.

Other businesses had changed their agent because they felt they were currently paying too much tax. These businesses were looking to reduce overall costs to the business and were therefore also reluctant to invest time and money establishing a relationship with a new agent, instead wanting light touch support.

It was found that businesses were more satisfied with their new agent if more time had been invested at the outset, leading to a higher level of engagement. This involved discussing business-specific circumstances including past cases of non-compliance, as well as full checks being carried out on accounts and processes. Businesses were particularly positive where recommendations had been made for more effective and efficient ways of working.

“‘We sat down and really hashed out what I needed…it made me more confident.”

Smaller Mid-sized business, Growing, South East

Case study 7 of a small, static plumbing business that was re-establishing trust with a new agent.

The business’ previous long-standing agent made a significant error on a tax return calculation. The business’ priority was paying as little tax as possible within the law. The business sought recommendations for a different agent. The new agent was thorough at the outset in defining tax needs. This was a point of intervention: the upfront investment of time forged a stronger, more trusted relationship. The business re-established perception of the agent as a trusted advisor. The business said “They’ve shown interest in what’s going on here and have really stepped up to the service that we wanted”.

Question 7

7.      Interactions with HMRC

Accepted Answer

This section explores the relationship different sized businesses and agents have with HMRC. It looks at the reasons why businesses and agents contact HMRC and their experiences of this contact. It also outlines what support is sought from alternative sources to HMRC and why.

7.1 Business contact with HMRC

Generally, businesses had lower levels of contact with HMRC than with their agents. The extent and type of contact varied depending on business size and was largely driven by the level of financial confidence within the business.

For small businesses, contact with HMRC was limited. Where they had queries or needed advice, they contacted their agent in the first instance to see if this was something that could be resolved on their behalf. In this way, businesses viewed their agent as an intermediary between them and HMRC.

“I will get my accountant to get in touch if they write to me. I like to keep them [HMRC] at arm’s length.”

Small business, Static, South West

Small businesses were reluctant to have further interactions with HMRC for several reasons. For some, this was because of their perception of HMRC being distant and remote from businesses like theirs. These businesses reported finding HMRC intimidating at times; they were concerned that if they got something wrong, they may face punishment. For others, the usability of services was the deterrent for further contact. Resources, such as the website, were perceived as difficult to navigate. It was seen to have too much legal language and required a level of understanding of tax which limited their ability to interact with it effectively. Some of these businesses also raised concerns about calling the helpline, as they were worried, they would not be able to answer questions posed by HMRC.

There were a limited number of occasions in which small businesses did contact HMRC. These were transactional interactions such as submitting returns or paying fines. The steps taken to complete these transactions were often facilitated through their agent and required very little two-way communication.

Small businesses saw the potential for HMRC to play a greater role in the future, particularly during the business set up phase. They felt that HMRC could provide more accessible support for those wanting to start a business, but with little experience of managing tax obligations. They felt this would facilitate a reduced role of the agent, and therefore lower costs to the business while maintaining the quality of their returns.

“‘HMRC could send an e-mail to a new business saying come in for training on what things we expect from you.”

Small business, Static, South West

Mid-sized businesses had more confidence than small businesses in contacting HMRC, but it was still not common. As these businesses often had internal expertise, they were more confident navigating the website for their answers than smaller businesses.

“The website is pretty good. It’s a bit clunky but it has most of the info you need.”

Smaller Mid-sized business, Growing, South East

Common reasons for contacting HMRC were to resolve issues around late payments. If an error was noticed on an internally managed tax obligation, larger businesses had no reservations in contacting HMRC directly to correct it, most commonly via telephone. Similarly, on tax obligations which are managed internally there were a small number of occasions when businesses had contacted HMRC to confirm that their calculations were correct.

“I speak to them [HMRC] every now and again. I ask them to help with calculations.”

Smaller Mid-sized business, Growing, South East

However, contact with HMRC was not seen as a regular occurrence for Mid-sized businesses. They would more commonly either refer to their internal expertise or contact their agent before contacting HMRC.

“‘We will deal with everything ourselves, yes…if it’s something I’m not sure about I’d have a quick chat with the accountant beforehand.”

Larger Mid-sized business, Static, South East

7.2 Agent contact with HMRC

Agents tended to have considerably more contact with HMRC than their clients. This contact tended to be for problem resolution on behalf of their clients for issues such as incorrect late return notices and correcting previously submitted returns.

Agents also saw the HMRC website as being a useful resource, and in contrast to the businesses found the HMRC website easier to navigate and understand. This was in part due to their familiarity with the website as they had more cause to visit than their client, and because of their greater tax understanding. Views on seminars provided by HMRC were varied. While a small number were critical of the lack of depth of knowledge during seminars on Making Tax Digital, agents generally thought that seminars were a valuable resource and were well tailored to specific issues (for example, supporting businesses who are also taxed abroad). That HMRC offered clarity on its stance upon such issues was appreciated by those agents who had engaged with the seminars.

“Before you’d get jargonistic replies whereas with these lectures you understand the rationale behind things and the mechanics of how things work.”

Agent, South East

However, agents did raise consistent issues around contacting HMRC, particularly regarding more complex queries. Frequent complaints were made regarding the challenges of speaking to HMRC staff and of their competency. There were references to being kept on hold for extended periods of time and being passed from person to person. It was further felt that often the helpline staff were not ‘experts’ in the types of advice that was needed.

“‘The people that work there are reading from a script. You’re very fortunate if you get someone who has worked there for years these days.”

Agent, South East

As this could lead to a great deal of frustration and wasted time, agents instead tended to rely upon professional networks and paid external consultants for advice. Contacting alternative tax experts to HMRC was considered a more economical and efficient means of answering queries. There was a great deal of advice and support available from colleagues, professional networks and experts who provided faster and more accessible advice on complex tax issues.

“If we are out of our comfort zone, we would speak to one of our other associates. It’s hard to get through to someone at HMRC, it’s hard to reach the tax specialists.”

Agent, South East

Question 8

8.      Perceptions of the future role of agents

Accepted Answer

8.1 Consideration of changes to the role and use of agents

Generally, businesses across the sizes wanted and expected consistency in the types and depth of interaction with their agent. Consistency was a priority for those small and Mid-sized businesses where the relationship was working well and had not changed in a long period of time.

Amongst small, static businesses, their focus tended to be solely upon improving their business’s prospects. They were not considering options such as bringing finance processes in-house as they often did not have the skills or resource. It was not anticipated amongst static businesses that the role of the agent would change significantly, if at all. For many businesses, change is often challenging and maintaining the status quo on their tax affairs so they could focus on their business was seen as the priority.

“We will continue with our existing agent as the relationship is good, there are no errors, and he does what is expected of him.”

Small business, Growing, West Midlands

Small, growing businesses anticipated relying more upon their agents. As tax confidence is often limited amongst these businesses, if their tax obligations increase, they may need to depend upon their agent to support them in managing their new obligations. For example, if a business grows to the point where they need to be VAT registered, an agent could need to support the business in how this new process works and what is required. For those businesses who are very unconfident in tax management, the support they need from their agent could be significant.

“VAT can be such a woolly field, lots of grey areas and there’s so many things open to interpretation and possibly abuse. We have to steer people and that will always be the case.”

Agent, South East

Mid-sized businesses were less averse to change but were more focused on the costs and benefits of changing the role of their agent. Mid-sized businesses had often considered the benefits of bringing managing more of their tax obligations internally. This was seen as a way to save on direct costs if there was enough expertise within the business. These benefits were weighed up against the costs, which were framed as having less time to spend on other more strategic activities.

“We might look to bring things in-house.”

Smaller Mid-sized business, Growing, West Midlands

Some Mid-sized businesses also looked at the benefits of expanding the agent’s consultative role. This was seen as more beneficial to smaller Mid-sized businesses who had less internal expertise.

8.2 Consideration of current changes in tax processes and future opportunities

Agents recognised that with the introduction of Making Tax Digital, their role could evolve significantly. In the short-term, many are of the view that their role will increase amongst small businesses and decrease amongst larger businesses. This view was largely echoed by businesses. They also saw opportunities for evolving the type of services provided to businesses as tax management became increasingly digital and automated.

The implementation of Making Tax Digital is anticipated to be a time of change for some small businesses above the VAT threshold. Those who felt they were unable to invest the time in understanding the system or who were digitally unconfident, perceived change to be significant. Amongst these businesses, agents anticipated that their role would only increase as more and more systems become digitalised.

“Some people are struggling and so are employing accountants to help them with [Making Tax Digital].”

Agent, North England

Small businesses that have digital confidence also suggested that they would require additional agent support during the transition to Making Tax Digital. While they perceived themselves to be digitally confident, lower tax confidence meant that they felt that they needed reassurance that they had entered the data correctly. With these businesses, as their confidence and familiarity grow, they may become less reliant upon their agent for support and ‘hand holding’, and the agent’s role may gradually decrease.

“There will still be a need for what I do but it’s going to become more automated.”

Agent, North England

Mid-sized businesses were much more confident with the introduction of Making Tax Digital. These businesses saw Making Tax Digital as an additional means to support compliance, and it was therefore anticipated that during and after the implementation of Making Tax Digital their interaction with their agents would be similar or less. These businesses were all confident online and were already using systems to manage their accounts and finances. Making Tax Digital therefore was perceived only to require a small level of work to become familiarised which could be done internally rather than with an agent. As Making Tax Digital beds in for these businesses it is anticipated that tax management will become more and more automated. With this increased automation, the practical support offered by the agent may become superfluous. Businesses could therefore instead look to utilise their agents in a more consultative and strategic way to advise them on how best to manage their tax obligations in the most tax efficient way possible. Agents were generally in favour of supporting businesses in this way moving forward.

“We will do more advisory services as basic services will drop away - they’re already disappearing.”

Agent, South East

Question 9

9.      Conclusions

Accepted Answer

This section looks to summarise the key findings of the research and highlight the areas in which businesses and agents think their interactions could become more meaningful and effective.

The research found that business-agent relationships tended to be stable. They had often been formed at the inception of the business and had continued ever since. Because of the longevity of the relationship, and the lack of issues emerging, there was a mutual trust between the two parties. While this was largely accepted to be a positive element of the relationship, some noted that this led to quicker, less thorough checks and errors being missed.

Expectations around compliance, the role of the agent, and the level and type of interaction were defined at the start of the relationship. From this point, agents were generally seen to be effective in their role. Where expectations were not upheld, businesses were more likely to look to change their agent.

Small and Mid-sized businesses used their agents in different ways. There was a heavy reliance upon agents by small businesses for day-to-day financial management and ensuring compliance. Mid-sized businesses were less reliant on their agent because of greater levels of internal knowledge, but most remained reliant on their agent for support on specific tasks and for final checks of their accounts.

Whilst compliance was found to be of utmost importance across all business sizes, the motivations to be compliant varied. Mid-sized businesses tended to be motivated for more transactional reasons (for example, the close monitoring of finances was considered to be an important part of running a business) and thought more of their professional reputation, whereas small businesses were more emotional in their reasoning and were concerned about the personal consequences of non-compliance.

Contact with HMRC is limited for both agents and businesses. Anticipating how HMRC could implement changes to improve compliance is therefore, in practice, challenging.

Key points in a business’ journey were found to carry a higher level of risk for non-compliance. These were: business set up, regular annual and quarterly returns, business growth and changing agent. A number of ways were suggested to make business-agent interactions more effective, and therefore reduce the risk of non-compliance. These included:

businesses and agents wanted expectations to be defined at the start of the relationship, ensuring businesses are fully aware of all their obligations and what is required to effectively manage them
small businesses were sometimes unaware of their tax obligations at set up and needed agents to direct initial discussions to increase awareness and facilitate compliance
business-agent relationships were most efficient and effective where agents offered time and cost-efficient solutions such as a ‘pay as you call’ system to foster a culture of ‘quick checks’ or offered a matrix on common business questions to reduce time needed for simple queries
at key points in the year the burden on agents was significant and the risk of agent mistakes increased, agents repeatedly stated the need for HMRC to consider staggering deadlines for returns across different businesses to reduce this burden

Question 10

10. Technical Appendix

Accepted Answer

10.1 Research approach

The research took a journey mapping approach. Journey mapping involves a researcher guiding a participant through a given time period to aid recall of events, timings and feelings. The researcher uses a timeline to map the journey that a participant has gone through.

In this case, this approach allowed us to identify key touch-points in the journey where interactions took place and where there were risks or opportunities to support compliance. There was an initial focus on the last 12 months to ensure reliable recall, but where appropriate participants discussed their experiences more broadly. Importantly, we encouraged participants to compare recent and past experiences and reflect on how these behaviours and experiences might change in the future.

10.2 Sample table

Sample by business size

Business size	Number of interviews
Small businesses	24
Mid-sized (smaller) £10-£50m revenue, 20-50 employees	12
Mid-sized (larger) £50m+ revenue	12
Tax Agents	22

Sample by key characteristics

Key characteristics	Small businesses	Mid-sized (smaller) £10-£50m revenue, 20-50 employees	Mid-sized (larger) £50m+ revenue	Tax Agents
Static	12	4	5	5
Growing	12	8	7	1
Mix of tax streams (Corporation tax, Customs and excise, Income tax, PAYE, Self Assessment, VAT)	21	12	12	22
1. Professional, Scientific and Technical Activities	1	2	0	N/A
2. Wholesale and Retail trade; Repair of Motor Vehicles and motorcycles	2	0	1	N/A
3. Construction	6	1	4	N/A
4. Accommodation and Food Service Activities	3	0	0	N/A
5. Manufacturing	1	2	2	N/A
6. Transportation and Storage	0	1	0	N/A
7. Agriculture, Forestry and Fishing	1	0	0	N/A
8. Arts, Entertainment and Recreation	4	0	0	N/A
9. Real Estate Activities	0	1	1	N/A
10. Human Health and Social Work Activities	1	1	1	N/A
11. Education	1	0	0	N/A
12. Financial and Insurance Activities	1	2	1	N/A
13. Other	3	2	2	N/A
Compliance, confident	22	12	12	N/A
Compliance, not sure / in-between	1	0	0	N/A
Compliance, not confident	1	0	0	N/A

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1. Glossary

2. Executive summary

2.1 Introduction

2.2 The business-agent relationship

2.3 Attitudes to tax compliance

2.4 Recognising and managing risk points for non-compliance

Business set up

Regular returns

Business growth

Changing agent

2.5 Interactions with HMRC

2.6 Future role of agents

3. Introduction

3.1 Background

3.2 Research Aims

3.3 Method

4. Defining the business-agent relationship

4.1 Trust in the business-agent relationship

4.2 Setting expectations

4.3 Content of business-agent interactions

Reactive versus proactive support

Small business interaction with agents

Mid-sized businesses’ interactions with agents

4.4 Changing agents

5. Attitudes to compliance

5.1 Business attitudes to compliance

5.2 Agent attitudes to compliance

5.3 Reliance on others for compliance

6. Recognising and managing risk points for non-compliance

6.1 Recognising cases of non-compliance

6.2 High risk non-compliance points

Business set-up

Case study 1 of a small but growing catering business.

Case study 2 of a small, growing education business.

Regular returns

Case study 3 of a small agent doing less thorough checks on reliable businesses.

Case study 4 of a small, growing management business completing their own tax returns for obligations that they have a low awareness of.

Business growth

Case study 5 of a Mid-sized agent working with a business uncertain of whether the option to tax was in place after business growth.

Case study 6 of a Mid-sized agent lacking oversight of the whole process of the business they were working with.

Changes in agent

Case study 7 of a small, static plumbing business that was re-establishing trust with a new agent.

7. Interactions with HMRC

7.1 Business contact with HMRC

7.2 Agent contact with HMRC

8. Perceptions of the future role of agents

8.1 Consideration of changes to the role and use of agents

8.2 Consideration of current changes in tax processes and future opportunities

9. Conclusions

10. Technical Appendix

10.1 Research approach

10.2 Sample table

Sample by business size

Sample by key characteristics

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