Tax & admin · 18 January 2016

Small firms issue proposals in response to digital tax changes

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The FSB has called for simplifications to the tax system for small firms

Owners of small and micro businesses have made a series of proposals designed to simplify taxes ahead of planned government changes that will require companies to submit reports to HMRC every quarter from 2018.

Three key pieces of information will need to be provided to calculate a firm’s quarterly tax bill: a firm’s sales figures, payroll and interest costs – under one of the proposals put forward by the Federation of Small Businesses (FSB).

According to a FSB announcement, the government’s planned move towards complete digital record-keeping increased the need for simple taxes that small firms could easily understand.

“Simplification is necessary for the digitisation of tax to be effective for HMRC and meaningful for smaller businesses,” the statement read.

The FSB proposals have been submitted to an official review by the Office of Tax Simplification, ahead of the chancellor’s Budget announcement in March 2016.

According to the Financial Times, the simplifications would replace the need for separate assessments for business rates, corporation tax, value added tax and national insurance contributions.

Global head of tax policy at consultancy EY, Chris Sanger, who worked on the proposals, told the paper that the government should be encouraged to introduce a “taxpayer-centered approach” that goes further than simply making incremental improvements to certain individual taxes.

Under the proposals, certain assumptions would be made about a firm’s costs as a percentage of turnover, with companies in the same sector assumed to operate within similar profit margins. “The simplicity it could bring could be very attractive for a subset of small businesses,” Sanger said.

The FSB also proposed replacing corporation tax with a distributive tax, and introducing the option for companies to be “tax transparent” – meaning that income would be considered to be earned directly by business shareholders.

The FSB said the review of taxation for small businesses was coming at a “critical time” as the government’s plan will necessitate that owners keep digital records of income and costs, and report to HMRC every quarter, from 2018.

Whilst designed to make tax submissions easier for small businesses, the FSB has been joined by other influential bodies in warning HMRC that enforcing the move to digital may make many small business owners automatically non-compliant.

A statement issued by The Low Incomes Tax Reform Group said in response to the proposals: “We do not believe this is workable for the majority of micro businesses, in particular those which do not maintain business records using accounting software.”

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ABOUT THE EXPERT

Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.

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