In May, the Office of Tax Simplification (OTS) published its report Simplifying everyday tax for smaller businesses, the second of two reports requested by the Chancellor of the Exchequer to examine the business lifecycle. ‘Smaller’ businesses are taken to be those with fewer than ten employees and turnover of under £2 million.
It is often said that small business provides the engine of the economy, and some of the statistics quoted in this report show why. They make up over 99% of the 5.7 million businesses in the UK, and three-quarters of them have no employees apart from the owner. The report focuses on the administrative processes that people encounter when they deal with tax, so as to improve taxpayer experience overall.
The report found that interactions with the tax system are particularly significant when businesses start up, register for tax, and take on their first employee. The period from start-up to registration for tax (‘pre-formalisation’) can be as long as 18 months, during which the owner focuses on the needs of the business and building up clients – this is when mistakes tend to be made, such as taking on staff without realising that they are actually employees, or inadvisedly setting up as a company. The report makes various recommendations to smooth the path through this period: HMRC should develop plain English guidance for this crucial stage, with tax as a major (though not the only) focus, on what the business should know at key stages. This guidance should be tailored to different types of business, be available in various formats – online, paper, visual displays – and be distributed through a range of outlets such as job centres, growth hubs, banks, charities and so forth.
A particularly interesting feature of the report is what it says about PAYE. The PAYE system simplifies things significantly in that it ensures that ‘most UK taxpayers never have to think about tax or do a tax return’. It also allows large amounts of tax to be collected with ease: some £154 billion in 2017/18, or 28% of all HMRC tax collected. While HMRC is committed to careful management of PAYE and is strengthening its oversight of core processes, there is:
‘no one person with overall strategic ownership or oversight of PAYE . . . this is a significant gap, making it harder to prioritise and implement cross-cutting changes and sustain development of a future vision for PAYE.’
Perhaps because of this, RTI has yet to fulfil its full potential in terms of accuracy and transparency, despite having achieved many of its goals. The system has particular weaknesses where taxpayers change job mid-month or have multiple jobs or employment and self-employment running concurrently; there are some 350,000 duplicate employment records and 5% of returns are received late.
Here, the report makes two sets of recommendations. The first is for a strategic focus on PAYE, including appropriate oversight of the whole system, implementation of HMRC’s commitments following the 2017 post-implementation review of RTI, working with employers and agents to devise solutions where the system is not working efficiently, and drawing up a roadmap to show planned improvements over the next five years.
The second is for a review of the whole system, possibly to be carried out by the OTS, considering where the system can be better fitted to modern working patterns, and identifying options for streamlining and simplifying processes.
The report also recommends that HMRC should appoint a senior official to oversee and prioritise implementation of the 2014 Agent Strategy and should ensure in future that the needs of agents are considered and built into system design and improvement. In particular, agents should be able to see what their clients can see and should be copied into all key correspondence with their clients. HMRC should produce a roadmap setting out the dates by which these recommendations will be implemented.
Corporation tax is a complex area where most small businesses appoint agents to help, particularly with the extra work involved in filing accounts for tax purposes. The report recommends that HMRC should work with Companies House to devise digital options for preparing accounts which can be used by other departments too and, as part of Making Tax Digital, HMRC should simplify CT online returns so that, like self-assessment tax returns, taxpayers only see those pages, including pop-up pages and help screens, that are relevant to them. HMRC should also explore ways of reducing the numbers of companies that have to file more than one set of accounts in their first accounting period.
Finally, the report recommends that HMRC should plot ‘customer journeys’ for small businesses in the tax system, including payment processes, to align and streamline their experience of all taxes. Looking ahead, the OTS sees merit in exploring a PAYE-like experience for self-employed people, whose numbers have grown by 25% since 2007/08. Many small businesses whom the OTS consulted found it difficult to set aside money for long periods towards future tax liabilities and would welcome an optional process whereby they could put aside an appropriate amount each month.
As a Chancellor-led review, this report deserves serious consideration from the government. HMRC has tended in the past to point to the small business element in the official tax gap figures as evidence of the need for compliance activity, but a determined effort to make smaller businesses’ engagement with the tax system simpler and more streamlined is just as likely to plug that gap by driving up voluntary compliance. Taxpayers are more likely to do what is expected of them if they can easily find out what they are supposed to do, and when.
Robin Williamson MBE CTA (Fellow) is an author and commentator on tax, welfare and public policy, and a part-time senior policy adviser at the Office of Tax Simplification. He was technical director of the CIOT’s Low Incomes Tax Reform Group from 2003 to 2018.