The Office for Tax Simplification (OTS) yesterday published Recommendations to simplify UK’s tax system for small businesses
The OTS review covered three key areas:
- HMRC’s administration;
- disincorporation; and
- simplified taxation for the very smallest businesses (those with turnover under £30,000).
The key recommendations for each area are:
- Tax Administration - the OTS has found clear scope for changes to be made in the way the tax system is run that will make a genuine difference. There is much that is working well, and HMRC already have a range of initiatives in hand that the OTS endorses, but the OTS has developed a range of practical changes. These will help in areas of raising awareness of the help that is available, improving communication, improving the relationships between HMRC and the small business community and ways to gives businesses more certainty about their tax affairs. Recommendations include the use of two-way email communication, better VAT rulings and information and a dedicated helpline for small businesses.
- Simplified taxation for the smallest businesses – the OTS established that for the very smallest business – often “one man bands” – cash accounts are widely used, whilst claiming for businesses expenses are disproportionately burdensome given the limited amounts often involved. The OTS therefore recommends that receipts and payments accounting is accepted, instead of full ‘GAAP’ accounts. The OTS also recommends a wider range of flat rate expense allowances be available. These methods should be the default option for qualifying businesses, with an “opt-out” allowing those to select the system that is most beneficial to them. Furthermore, the OTS recommends a full study is undertaken of a turnover tax as a possible alternative for the smallest businesses.
- Disincorporation – the OTS identified that a number of the smallest companies would like to ‘disincorporate’ and move to an unincorprated status. The current tax system mitigates against this, so the OTS has proposed the introduction of a tax relief so that companies can disincorporate without incurring significant tax cost. This would parallel the existing incorporation relief. This would have the dual benefit of reducing admin burdens whist facilitating business reorganisations allowing businesses to trade in their correct form.
“We have spent a lot of time gathering the views of businesses and their advisers about the tax system from the sharp end. That has led us to recommend a range of practical changes to the way the system runs that will help businesses with their everyday tax affairs – and will help HMRC as well.
We have also looked for ways of changing the tax system and that has led us to recommend introducing a disincorporation relief and a wider range of flat rate allowances.
There’s a strong case for a form of cash accounting and indeed we think that going further into a radically different way of calculating tax for the smallest businesses needs study.
Overall, we think that the recommendations put forward today represent a common sense approach that would help to ease the burdens of thousands of the smallest businesses throughout the UK.”
The report report is broken down into three papers. The first paper brings the above strands together, and also covers the detailed recommendations on tax administration.
Key elements of the first report "Small business tax review: Final report, HMRC administration February 2012" are highlighted below:
It notes that there is a clear need for simplification:
"given the large number of businesses and the disproportionate cost of tax administration, simplification measures for very small businesses have the potential to deliver significant benefits to the economy."
Unsurprisingly the OTS found that SME's were fearful of HMRC and of making mistakes:
"fear is much harder to quantify than time or cost and tends to be less prominent in the policy debate."
Communications with HMRC (as loyal readers are well aware) is a matter that features within the report:
"there are clear examples in tax administration where the system makes it surprisingly difficult to make the correct “choice”. Examples raised in this paper include the processes for paying HMRC and the reliance on postal communication when email would be the preferred method of communication.
The preference is a facility to email named individuals within HMRC; we accept this may not be possible but businesses would, we think, be happy if there was a generic “smallbusiness@HMRC” email address to use."
Communications from HMRC are also regarded as being somewhat "unfathomable":
"Generic guidance from HMRC that is overwhelming and written in inaccessible language can be counterproductive as it pushes people toward less accurate and less reliable sources of advice."
Sadly, despite the fact that HMRC staff on the front line do try to do their best to answer questions put to them, the level of complexity of the tax system and the poor quality of training with HMRC result in confusing answers:
"Some 23% of businesses surveyed by TFC experienced difficulty obtaining a definitive answer from HMRC, with 30% having difficulty making sense of the answer and only 45% having confidence in the answer received.
There is also evidence of different answers being received to the same question."
Here is an extract of the summary:
"Communication with HMRC and improving the relationship with taxpayers
Difficulties communicating with HMRC can increase costs, create delays and cause confusion. The OTS recommends introducing two-way email communication, with response times within a set timeframe. A further popular improvement requested by businesses would be the introduction of a dedicated small business telephone helpline. HMRC should also continue with its ongoing programme of work on the tone and content of its communication with small businesses to ensure that such communication is meeting the needs of the business. Better tracking of correspondence and other communications would also be a welcome improvement.
Providing certainty
Businesses are entitled to expect clear answers on which they may rely in order to meet their tax obligations. Published information and HMRC staff training should ensure that this need is met. The OTS recommends that where a complex issue is raised, ownership be given to a particular HMRC officer until resolved. The prospect of a penalty for an innocent error leads to unnecessary fear among some small businesses so HMRC should make greater use of suspended penalties.
Making it easier for taxpayers to fulfil their existing obligations
This report makes a number of specific recommendations on improving processes to make tax obligations simpler and easier for those small businesses affected.
The overriding message here is that many small businesses look to HMRC for guidance in tax matters. It is perhaps valid to question whether businesses should look to external tax advisers for the necessary assistance instead. HMRC arguably does not have the resources to do as much as taxpayers and agents would like and its resources are likely to continue to be reduced. It is clear from our research, however, that many small businesses want to be more in control of their tax affairs and they look to HMRC to help them. These businesses want the freedom to decide when to involve external tax advisers.
We think this stance is entirely valid and we have accordingly reflected the needs of those small businesses in many of our recommendations. It will be deduced that the OTS thinks that, as the tax authority, HMRC has an obligation to help taxpayers comply with the tax system: self assessment only goes so far. We are encouraged that many in HMRC recognise these obligations and want to help businesses appropriately. It will clearly be challenging for HMRC to deliver the programme we have outlined but we think that what we have suggested is not all “one way”: there will be payback to HMRC through better compliance and more efficient use of their limited resources.
We have outlined a suggested timetable for delivering our recommendations, taking account of the deliverability by HMRC and the links with ongoing initiatives. We acknowledge that HMRC already has a number of initiatives under way that will address various aspects of our recommendations and the report highlights where these need greater focus or advertising. The recommendations in this report are summarised in Chapter 8, and are further divided between those that the OTS believes could be introduced in the short term for the immediate benefit of business, those which will need to await the introduction of the single Government domain later in 2012 and those which would be longer term initiatives.
One point to highlight is that those who come to this report expecting to find a single “blockbuster” change that will solve all small businesses’ problems with the tax system will be disappointed. The OTS has found much that is working well with the current tax system but, at the same time, there is scope for changes that will make a genuine difference. Many of the points made in Chapters 4, 5 and 6 are relatively minor, but taken together they will make a material difference. Also, the ten areas listed within Chapter 7 are a significant agenda for change.
It is the view of the OTS that tax administration for small business must be kept under review with any changes evaluated and, where appropriate, improved on. The OTS experience suggests that taxpayers are more willing to offer challenging and candid views when speaking to a third party.
There is a clear ongoing role for groups such as the Administrative Burdens Advisory Board to continue to challenge HMRC on administrative issues, and there should also be a mechanism in place to feed back ideas to HMRC for systematic improvements. Finally, it is important to stress that the role of the OTS is to advise Government and it cannot make policy decisions itself. We have presented these recommendations to the Chancellor of the Exchequer and anticipate a formal response as part of Budget 2012."
Tax does have to be taxing.
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