SME tax: Is Britain’s SME growth being choked by tax ‘red-tape?’
There is little doubt that Britain has become a nation of entrepreneurs.
According to figures published by the Federation of Small Businesses, the number of companies in the UK has grown by more than 2.2 million since the turn of the century alone.
Almost 90 per cent of that increase has been accounted for by small firms, predominantly sole traders or “non-employing businesses”
The contribution made to the economy by those firms and other small companies is not insignificant. In fact, 51 per cent (£1.9 trillion) of all private sector turnover is generated by SMEs.
At a time when various financial and political issues – and, in particular, Brexit – have given concern about how robust Britain’s economy will be in the future, you might imagine that ministers would be attempting to nurture the country’s creative spark.
However, a new survey by the British Chambers of Commerce has found that many businesses are feeling decidedly unloved.
Three-quarters of companies which participated in the study reported that the burden involved in complying with an ever more complex tax code have increased over the last five years.
That outcome has fuelled the BCC’s twin demands for ministers to reduce the amount of complexity and for HMRC to be more supportive of companies doing their bit to abide by the rules.
I have to say that I believe the Chambers of Commerce appear to have a point.
A swathe of relatively recent SME tax developments illustrates the point adequately.
Now, businesses have to report employees’ PAYE information in real time – sending detailed information before each employee payment as opposed to waiting until the end of each financial year as they had done previously. Failing to do so can mean being hit with fairly hefty fines. Of course, this allows HMRC to reconcile payments more quickly and to detect fraud. However, the legwork has been outsourced to the taxpayer.
The same goes for making contributions on behalf of staff who have been auto-enrolled into pension schemes. The need to make sure everyone saves for retirement has been outsourced to the employer with further hefty penalties for non-compliance.
This outsourcing of difficult SME tax admin is unlikely to stop. Recently we have seen the risk for operating the problematic IR35 anti-avoidance rules being shifted on to the public sector where they engage contractors. We will soon see these rules being rolled out to the private sector. This seems somewhat dotty as this is an area where HMRC consistently loses in the Courts. If you can’t beat them, outsource!
In addition, the Office of Tax Simplification this week released proposals on how best the economy might embrace the growing ‘gig economy’. They included the suggestion that employers or HMRC might offer schemes “which would function in a way that is comparable to how PAYE works for employees”.
Finally, we can also add the imminent roll-out of the Government’s signature ‘Making Tax Digital’ (“MTD”) scheme, something which will impose another layer of administation on businesses.
Taking all those things into consideration, an impartial observer might well agree with what the Chambers of Commerce are saying.
Their position is given even greater credence when one weighs up the critical scrutiny under which small businesses find themselves.
HMRC’s latest annual report stated that 41 per cent of the country’s £33 billion ‘tax gap’ can be attributed to small businesses.
That’s almost twice as large as the proportion of tax owed by large businesses.
Yet if one examines the resources made available to HMRC to increase its tax take, it’s possible that this is skewed towards counter-avoidance and offshore matters as opposed to working with small businesses to close that ‘gap’.
You could understand why that might be, given that pursuing avoidance and evasion provides more bang for the buck and also generates the right headlines.
As a result, much of the onus for administering other, more routine types of taxes falls to businesses themselves. Developments such as MTD will provide HMRC with ‘real time’ information to reconcile this information with a range of penalties to punish errant businesses.
It is perhaps this ‘outsourcing’ that leads to the sort of complaints now aired by the Chambers of Commerce.
Clearly, a balance has to be struck between how HMRC uses its resources and what the Government asks of small businesses.
If not, there is a danger that some people might decide it’s simply too much hassle to start a business in the first place or – given the possible commercial tensions of Brexit – decide to start companies up somewhere other than Britain.
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Like this article? Check out our recent article about Entrepreneurs Relief, learn more about R&D tax credits for SMEs or check out this recent post about SME growth in the UK. For the latest tax advice concerning SMEs and corporate tax check out our services for individuals and companies or be sure to contact us with any questions about SMEs/ small business taxes, PAYE and/or VAT advice.