The average UK small business spends £5,000 and three working weeks every year on tax compliance, according to the latest report from the Federation of Small Businesses (FSB).
Taxing Times highlights the many hurdles small businesses face when trying to pay taxes. Almost half (46%) say determining the tax rates at which they’re required to pay is a challenge. Four in ten (40 per cent) find exemptions confusing.
Value Added Tax (VAT), Pay As You Earn (PAYE) and Employer National Insurance Contributions (NICs) are identified as the most time-consuming taxes to handle. The average small business spends 95 hours a year complying with the three collectively.
Due to the complexity of the tax compliance process, more than three quarters (77 per cent) of small firms pay a specialist to ensure their taxes are paid correctly.
Almost half (47 per cent) of small firms say business rates have made growing their firm more difficult. The same proportion say corporation tax has hampered expansion, with similar numbers stating that growth has been stifled by Employers NICs (44 per cent). One in seven (14 per cent) small firms say VAT has prevented expansion completely.
When asked about changes that would reduce the tax compliance burden, the majority (53 per cent) say the ability to pay in instalments would make the process more straightforward. A similar proportion (52 per cent) would like to see an early estimation of their tax bill. Four in ten (40 per cent) state that the automation of tax calculations would be useful.
Mike Cherry, FSB National Chairman, said: “Time and money spent by small businesses on navigating the tax system is time and money not spent on innovating, expanding and creating jobs.
“We hear a lot about the need to simplify the UK tax code. In fact, our priority should be simplification of the tax compliance process. Small firms by and large understand a tax like VAT, for example, but the sheer complexity of VAT administration means they spend 44 hours a year filing returns. It’s no wonder the majority end up shelling out for expert help.
“The three working weeks and thousands of pounds a year that small firms lose to tax compliance is a huge drain on national productivity. That lost time and resource is the real issue, not the length of the tax code.
“The roll-out of Making Tax Digital needs to be seen as an opportunity to radically improve the small business user experience of HMRC. Done right, MTD could help streamline the process of small business tax compliance. Its success will hinge on a thorough user-testing and piloting period, significant improvements to HMRC’s user support channels and proper investment in the digital capabilities of small firms. It must remain voluntary for small businesses below the VAT threshold.
“Breaking down the process could also bring benefits. Giving firms an estimation of what tax bills will look like a few months before they’re due would help businesses to plan ahead. Equally, the ability to pay in instalments could make managing cash flow more straightforward. The easier taxes are to pay, the easier it will be for HMRC to collect revenue.”
Taxing Times also reveals that the majority (55 per cent) of small firms are not aware of tax reliefs available to them.
A number of reliefs have very low uptake among small firms, including the business rates relief offered to those based in Enterprise Zones. More than seven in ten (73 per cent) have not made use of, or even heard of, this relief. The same proportion are not aware of the Enhanced Capital Allowance, which encourages investment in clean technologies.
The most familiar tax reliefs to small firms are small business rates relief, which more than three quarters (78 per cent) are aware of or have claimed, and standard capital allowances (66 per cent). The dividend allowance (51 per cent) is also popular among small businesses.
Mike Cherry added: “There are lots of useful tax reliefs out there but many small firms simply don’t know they exist or don’t have the expertise to access them. Again user experience is an issue. Lots of firms actually employ consultancies to help them apply for R&D tax credits, for example. When applications are complex, it’s big firms, not time-strapped small business owners, which stand to gain.
“There needs to be a real push from local and central government to ensure small firms are aware of all the reliefs available. That starts with properly equipping Growth Hubs to point firms to different incentives.
“If we get the small firms that account for 99 per cent of the business population accessing these incentives we’ll be on the way to the incremental output gains that are critical to closing our productivity gap.”