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PAST BUDGETS HAVE focused overmuch on small businesses. This budget took a more measured approach: no deluge of under-researched, over-hyped reforms; no tirade against tax distortions, but instead a low-key document with the conciliatory title 'Working towards a new relationship'. Subtitled 'A consultation on priorities for reducing the administrative burden of the tax system on small business', David Varney says that he is aiming for a position where 'small businesses know where they stand, with simple information on what they owe, what they have already paid and what they need to pay, available when and in the form that they need it'.
He 'sets out the clear prospect' that, under the new combined HM Revenue and Customs (HMRC) department, small businesses will in future:
- have to provide information to HMRC only once;
- have to spend less time dealing with inspections;
- be able to benefit from a range of modern flexible payment options;
- have the benefit of a single point of contact with the new department; and
- have access to co-ordinated, clear and helpful support and education when and in the form they need it.
The detail of the document gives some more information on these points — for instance, 'less time dealing with inspections' will be the consequence of a more risk-based approach to enquiries, as a result of which 'the vast majority of businesses who are low risk should not be audited'. This will be balanced by better targeting of 'those who seek unfair advantage by avoiding their obligations to contribute their share of the revenue that funds vital public services'.
The issues and the areas of change
Nevertheless, a change in this area will be welcomed by most advisers. To look at one tax issue with which I am depressingly familiar, the Professional Contractors Group has been pressing the Revenue for some time to review the methodology used when selecting one-man companies for IR35 reviews. Enormous time has been wasted by individuals, their advisers and the Revenue in enquiries, which have, in over 99% of cases, not generated a single pound of extra taxation.
The Government also gives itself a pat on the back for abolishing payment of tax credits via employers (PVE) between November 2005 and April 2006, saving an estimated £90 million in payroll costs. (The size of this figure does, however, invite a re-reading of the regulatory impact assessment issued at the time PVE was introduced — was the extent of this employer burden acknowledged?) Elimination of PVE is a genuine reduction in red tape and deserves three cheers. But disquiet remains in the business community as to how this change will be communicated. It is not the job of employers to tell people how the tax credit system will work in the future, and forcing them to do so is the exact opposite of cutting 'administrative burdens and time wasted on paperwork'.
Simple information
'Simple information' translates as simpler forms as well as clearer guidance. One of the examples given by the document is the shorter form for self assessment, which will cover half a million small businesses. This is a real step forward, though at least some of the credit should be given to those who lobbied long and hard for it, such as the Low Income Tax Reform Group (LITRG).
Less deserving of praise is the revised form 42. The document says, somewhat disingenuously, that 'representative bodies have said that small businesses have often struggled to complete form 42 [and] a revised design will be available from April 2005'. As far as I am aware, most representative bodies have said that small businesses should not have to complete form 42 at all . The form is a classic example of bureaucracy gone bananas. It was designed for complex share transactions and its apparent application to ordinary small businesses and founder shares became apparent only later. It is the view of the CIOT that form 42 is not in fact a requirement in these cases, but the Revenue disagrees and continues to press ahead.
The document also talks about the VAT flat-rate scheme, of which 'not all small businesses take advantage'. To assist in uptake, the department will launch a marketing scheme. But anyone who has considered the flat-rate scheme knows that ignorance is not the main obstacle. It is the niggardly rates set for most types of businesses which deter take-up.
The research and development tax credit also gets some attention. It is described as a 'successful incentive' for small business and the new guide for small businesses seeking to claim it is praised. However, anecdotal evidence suggests that few truly small businesses claim this credit because of the complexity of the rules, and that many of those who do are immediately investigated by the Revenue.
Consultation and changes
This is not to say that better forms, clearer guidance, and targeted help are a bad thing. Of course they are not; but they must go hand in hand with substantive changes. Otherwise the wrapper will be simplified, leaving the tax inside impenetrable.
The Treasury is aware that the fiscal burden on small businesses is complex. The document issued at the time of the Pre-Budget Report, 'Small companies, the self-employed and the tax system', said that 'the treatment of incorporated businesses … may itself be a cause of tensions in the tax system that can have a disproportionate effect on some small businesses. For example, rules that are designed to prevent avoidance can add compliance and administrative costs to businesses. This also means that small, relatively straightforward businesses must understand and comply with rules that are also capable of being applied to more complex business structures. As a consequence, these rules can affect or be perceived to affect some small businesses more than larger concerns'.
That document was for 'discussion' and not 'consultation'; thus while comments were invited, no time limit was given for them to be received. Those who have put off responding should note that the Budget 'Red Book', at paragraph 5.119, has now set a deadline of 29 April 2005. It is likely that further consultation on the policy issues raised will follow the election. For its part, this Budget's 'New Relationship' document invites comments by 30 June as to how the compliance burden can be reduced for small businesses.
Will people bother to respond? It is undeniable that many working for and with small businesses have become cynical. The Small Business Service's 'Annual Survey of Small Businesses 2003' showed that well over two-thirds of small businesses believed Government takes 'little or no account of their concerns', only seven per cent said 'quite a lot' and less than one per cent 'a lot.' The balance said they did not know.
David Varney appears to recognise the need for a change of direction. He says:
'The key to building a successful business is to focus on understanding customers and meeting their needs. This must be done through a dialogue with small business. This paper offers small businesses and their advisers an opportunity to tell us about what they need from us, and what our priorities should be in responding to those needs.'
What is clear is that those who do not respond cannot influence. HMRC here appears to be making a genuine and honest attempt to engage in a broad-scale consultation with small business. The more good quality inputs it receives, the higher the chances that the new regime for small businesses will meet its needs.
Sharpen your pencils now!
Anne Redston chairs Personal Taxes at The Chartered Institute of Taxation.
