Tax & admin 21 June 2016

Small business tax is going to get a lot more taxing

The government hopes taking tax online will make life simpler for small businesses
The government hopes taking tax online will make life simpler for small businesses

Some years ago HMRC’s ads suggested that tax doesn’t have to be taxing – but Dave Chaplin, CEO of Contractor Calculator, fears that some years later, with its plans to digitalise the tax process, then it’s going to get a whole more taxing.

Making Tax Digital, the initiative announced in last year’s Autumn Statement, will force all small businesses, freelancers and contractors to submit quarterly tax returns, and that’s going to weigh them down with yet more onerous administration.

The government defended its small business tax proposal when forced to do so in a debate in parliament following a petition signed by 104,257 concerned people.  The government took the line that Making Tax Digital will not mean “four tax returns a year”. Quarterly updates will largely be a matter of checking data generated from record keeping software or apps and clicking “send”, it said.

It went on to say: “These reforms will not mean that businesses have to provide the equivalent of four tax returns every year. Updating HMRC through software or apps will deliver a light-touch process, much less burdensome and time-consuming than it is today.”

I would argue that it will be much more onerous than simply clicking send and seems to suggest that no-one in government, the Treasury or HMRC has a clue about what completing annual returns and corporation tax returns involves, unless of course we are about to learn that they are introducing new tax and accounting laws that will simplify the process in the coming years. Whilst the latter would be preferable, evidence and experience suggests the former.

Those policy makers who have conjured up the Making Tax Digital initiative have clearly not worked in the real world in a real business and we all know the real world does not fit into neat quarterly packages – the real world is untidy and complex. HMRC should know better as it continually works to drum up more legislation and works to correct its own legislative mistakes.

The idea that, for most real world businesses, something as important as tax liability can be reduced to “checking data generated from record keeping software or apps and clicking ‘send’” is risible. That’s if it were not for the fact that you can bet any company getting it wrong would be fined by HMRC for filing incorrect small business tax paperwork.

In the real world, every business chooses its own accountancy solution. There are some simple sole trader businesses that indeed use an app, and would fit the Making Tax Digital model.  However, the vast majority don’t. There are even still a few businesses adopting a “black bin bag” approach, and hand a sack of records to the bookkeeper or accountant every quarter or every year.

Not all accountants and bookkeepers use a service that will be updated in real time or overnight so they can just click and send. Or their system might not have the capability to integrate with HMRC’s new “tools”.

And is the taxman suggesting that we all use apps and software developed by HMRC? Are we to depend on a public sector IT project for something as vital for your business as its management accounts, financial reporting and tax calculations? I don’t think that is going to work.

What may have happened is that a policy adviser looked at RTI and its relatively painless implementation and thought “why don’t we do this for all businesses (larger businesses and sole traders already pay on account), which would be just like PAYE for companies and we get paid our tax even sooner?”

However, when it comes to small business tax, most employees are much less complex than businesses, and that RTI “success” is not one for HMRC. It is largely down to large and medium employers and their service providers developing working solutions so that they would not incur huge fines for not making it work.

Having to keep accounts regularly updated every three months is ridiculous. It would not surprise me if many businesses just guess the returns for Q1, Q2, Q3 and then do a balancing return for the final quarter.

Contractors and other small businesses do not have time for this initiative and could make better use of their company’s cash by investing it in growing and developing their business and not accountancy bills – that would make more money for the exchequer.

Making Tax Digital is a wonderful concept, but can’t work until the UK’s small business tax system has been radically simplified. Right now it can’t be simplified to just pressing the send button.

Dave Chaplin is the founder and CEO of Contractor Calculator, an online resource for contractors, freelancers and the self-employed.

Find out what the funniest excuses HMRC had for filing late tax returns were.

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