Taxation logo taxation mission text

Since 1927 the leading authority on tax law, practice and administration

Small but not forgotten

17 June 2008 / Allison Plager
Issue: 4163 / Categories: Comment & Analysis , Admin
What progress have HMRC made in improving the tax burden on small businesses? ALLISON PLAGER reports


  • SMEs play a vital role in UK plc
  • HMRC are honing the interventions process
  • More help is available for new businesses
  • What do SMEs want to make life easier?

Small businesses are the lifeblood of the UK. They provide employment for millions of people and contribute 40% of all HMRC taxes.

On that basis, you would have thought that the Government would like to keep them sweet, but quite often, past evidence is very much to the contrary.

That said, the Government has recognised that the tax burden on small businesses is high and that it would be sensible to try to make their life easier.

HMRC have recently published a paper, Delivering a new relationship with business, which looks at the progress they have made so far 'to improve the SME customer experience'.

Plenty of them

The UK has 4.5 million small and medium-sized enterprises; they provide employment for a staggering 13 million people (over half the private sector workforce) and they are responsible for almost 50% of the UK's turnover. In fact, 99% of all UK businesses are SMEs operating in a variety of different forms.

Small business owners are in business to make a living, not act as unpaid tax collectors any more than they have to, and HMRC recognise this.

HMRC say that their programme to reduce the administrative burden of the tax system is aimed at benefiting all businesses, but they estimate that SMEs have most to gain as 88% of the business tax administrative burden falls on them.

In line with most of the population, small businesses want to get their tax obligations right, and do it as quickly as possible. HMRC research has found that in particular SMEs would like:

  • Flexibility in the way that HMRC deal with individual businesses.
  • Fast resolution of any disputes over tax due.
  • An active approach in helping SMEs fulfil their obligations.
  • Consistency in service levels.
  • An understanding of business needs.

While HMRC consider that SMEs will benefit from the changes being made as a result of the 'Review of links with large business', they recognise that SMEs have separate needs and the paper sets out some of those specific initiatives.


The administrative burden borne by small businesses is huge and costly, in terms of money and time. Based on research which found that the burden imposed on business by the UK tax system was £5.1 billion a year, in the 2005 Budget HMRC set themselves two targets to achieve by 2010-11:

  • to reduce the number of forms and returns that businesses have to deal with by at least 10%;
  • to reduce the burden of complying with HMRC's audits and inspections by 10% within three years and by 15% within five years.

HMRC reckon that forms and returns represent 68% of the administrative burden at a cost to business of £3.37 billion. They report that progress so far on reducing this includes removing the need for 90% of new companies to complete form 42, introducing a new form P46, the new construction industry scheme and a redesigned VAT registration form.

Other changes to be made were flagged up in the 2007 PBR and include:

  • doubling the three line account threshold to £30,000 (for 2008 tax returns);
  • doubling the self assessment payment on account threshold to £1,000 (from April 2009);
  • introducing a notification threshold of £40,000 for all freehold and leasehold transactions (from Budget day 2008).

Online filing, much favoured by HMRC and Government and undoubtedly a time-saver when working well, has also seen some development with the ability to file increasing numbers of business returns online.


HMRC said in the 2007 Budget that they had reduced the net administrative burden of audits and inspections by around £43 million. This was due to the new construction industry scheme.

However, HMRC say that inspections remain an important part of securing compliance. In order to target the more problematic cases, HMRC plan:

  • to analyse risk as accurately as possible so that compliance checks are targeted according to the risk and behaviour of the taxpayer;
  • to have a range of suitable and proportionate interventions — the one size fits all approach does not suit all companies, especially those who try to comply but make errors;
  • to carry out interventions as quickly as possible — HMRC are training some general tax practitioners in direct, indirect tax and employer compliance to carry out single interventions dealing with tax on profits, PAYE and VAT, rather than interventions on each area;
  • to communicate more clearly to speed up the time spent on audits and inspections.

In addition, HMRC plan to survey businesses which have recently experienced an audit or inspection to find out how it went and obtain suggestions for how the system could be improved.

New businesses

It is difficult to say at what stage a business is under most pressure, but starting up must be a difficult time. According to the National Audit Office, some 700,000 businesses start up each year.

As well as getting the business going, the owner has to consider his tax obligations. HMRC try to help actively by contacting new businesses before they are due to file their first return, but as businesses also contact other organisations for help, HMRC are exploring how they can use such bodies to provide that help.

Looking at VAT, HMRC acknowledge the problems endured in 2007 but say that the 'threats to the VAT system' from missing trader fraud mean that they must make checks at the registration stage.

However, they add that it should not prevent 'legitimate businesses joining the VAT system'.

The burdens attached to being an employer are considerable. Of the 1.8 million employers, 95% are SMEs and over 25% have been in business for less than three years. These employers are the ones who will struggle most and HMRC have set up some initiatives:

  • free employer CD-ROM issued twice a year;
  • new employer starter pack;
  • prospective starter pack;
  • complex enquiries dealt with electronically, i.e. to receive e-mail responses within two days.

International traders can now visit the International Trade Single Window, which provides cross-government information in one place. HMRC say that on average 40,000 visits are made to the site each month.

Tax obligations

Help sorting out regulations and registration requirements is important, but HMRC's main raison d'être is to raise taxes. To this end, they are looking at introducing some flexibility about how companies pay their taxes.

This includes draft legislation enabling tax to be paid by credit card. In addition, the BillPay facility is being extended to corporation tax, National Insurance quarterly bills and VAT.

A plan for managing payments by direct debit is under development, including the option to set up a budget payment plan. HMRC say that this would also allow self assessment taxpayers to make regular payments towards their future liability.

Recognising that 15 million taxpayers use tax advisers, HMRC say that 'improving services for agents is a key priority'. This would include improving performance of core services and building better relationships with agents locally and nationally.

HMRC care

Finally, HMRC refer to their website which they are trying to make simpler to use. For example, they plan to improve the search facility and introduce a find a form tool.

Yes, HMRC do care! They say in the document that, after the summer floods in 2007, they visited some of the affected areas to talk to businesses which had suffered from flood damage. As a result they arranged the rescheduling of tax payments and helped with reconstituting lost records.

Likewise, in the past, HMRC have offered help to businesses affected by the foot and mouth crisis.

All very well

It is heartening that HMRC recognise the problems that businesses potentially face in dealing with their tax obligations and that they are trying to help. But the focus often seems to be on the large corporates.

For example, the mission of the new working group set up by the Government recently (see Update, 8 May 2008, page 479) is to look at how the tax system can be improved for multinational companies.

It is true that these companies play an important role in the UK's economy, but clearly, so do SMEs — as mentioned earlier they provide 40% of all UK taxes and provide employment for more than half the private sector workforce. Government therefore ignores SMEs at its peril.

The trouble is that individually, a small company yields virtually no power at all, compared with say one of the major banks or oil companies which, if it chose to move away from the UK would cause major headlines in the business press at least. Even en masse, SMEs have little power because they have no effective means of protest.

The commotion over the 10% rate will have a knock-on effect on all companies, but the burden will be greater for small businesses which will have to adjust their payroll, perhaps installing yet another version of their software, to deal with it.

Then there are the income shifting proposals which, although deferred from taking effect in April 2008, are planned for April 2009. Much has been written in the professional press about the likely record-keeping burden that these rules will place on affected businesses should they be introduced as they are.

Further consultation has been promised by HMRC, but little seems to be happening at the time of writing.  

It is, however, good news that the burden placed on SMEs by the tax system is back on HMRC's radar and that HMRC are emphasising their intention of helping SMEs and improving the system.

The ICAEW's Tax Faculty held a small business taxation workshop in April (see Is there a better way? by Francesca Lagerberg) which came up with ideas for where improvements could be made and what needed to be considered before changes were made. One of its conclusions was that SME taxation is a complicated area and there are no simple solutions.

Does part of the problem stem from the fact that the Treasury and HMRC have no idea what it is like to work within the budget and strictures of a small business environment?

Who in either of those departments, at decision-making level, has real commercial experience? Unless decision-makers know what it is like running a small business with all its pressures: budget, time, people etc., understanding will inevitably be limited.


Issue: 4163 / Categories: Comment & Analysis , Admin
back to top icon