By Darwin Friend, researcher at the TaxPayers’ Alliance
The annual event which businesses across the country fear is upon us: the deadline for self-assessment tax returns. With 4.96 million Britons self-employed and rising, a simpler system of self-assessment should be a priority for the government. Unfortunately, it continues to be a maze of a task that leaves small businesses and traders fuming. Such is the pressure they feel that more than half of the self-employed had a tax agent in 2016-17, adding to an already painful bill.
It is important to remember that simplifying taxes isn’t an easy task. The Office for Tax Simplification, led by Bill Dodwell, has worked hard to simplify the UK tax system. Yet Tolley’s tax guides for individual taxes show significant growth since the 1999-2000 tax year. In the 2019-20 edition, it proffers 2600 of legalise on Corporation Tax, 2600 pages on Income Tax and 1,972 pages on Capital Gains Tax, a 20-year increase of 290 per cent, 122 per cent and 129 per cent respectively. How can any small business, often dependent on a single person (if that) dealing with all administrative and financial matters, be expected to fully understand such a bewildering system? With fines the result if you fail to meet HMRC’s requirements, the tax system as it stands offers succour to tax advisors and lawyers versus head-scratching, expensive concerns for ordinary people.
This complexity not only hurts businesses, but also costs the government itself. Rachel Griffin, a tax and financial planning expert, pointed out that £6.4 billion worth of tax takings were lost due to errors made by people being careless, which was the most common reason for tax being lost in 2018-19. HMRC figures for 2017-18 also show £6.2 billion of tax takings lost as a result of differing “legal interpretations” from HMRC and taxpayers, often meaning that the tax authority ruled against HMRC. The taxman is frequently being overruled by the courts. If the UK tax authority doesn’t understand its own regime then how can it expect much-stretched businesses to? These figures clearly show that it would benefit taxman and taxpayer alike to simplify the overly complex tax system.
The government has already begun to reform with its IR35 reforms, which are being extended to the private sector from April 2020. This will see companies and recruitment agencies liable for ensuring contractors are not doing jobs similar to that of payroll employees. These have already been implemented for public sector freelancers leading to them being taxed as employees – meaning paying higher National Insurance contributions – while receiving none of the associated employment rights. HMRC predicts this will impact 170,000 contractors of whom 90 per cent will have their income reduced.
However, research by APSCo shows that only half of businesses affected are preparing for the rollout, suggesting a lack of understanding in the private sector about the impact of the reforms. This is because the reform was initially made to catch out tax avoidance in public sector bodies such as the BBC and NHS, yet now it will be small businesses who bear the brunt of red tape costs.
Instead of introducing reforms which add yet more layers of complexity and in this case will increase taxes on individuals, the government should be implementing changes that make life easier. One positive example is the introduction of pre-filled self-assessment tax returns in 2017, which the TaxPayers’ Alliance had called for in 2012. The Office for Tax Simplification has suggested that offering businesses the option to pay their self-assessment tax returns more regularly would be helpful (it may even reduce the last minute deadline day rush!), as would providing businesses the opportunity to see a running calculation of their tax bills.
It is vital that in the upcoming Budget, Sajid Javid takes action and reforms the tax system in a way that makes it more accessible for small businesses. The tax system is currently one of the many causes of the UK’s slow productivity and that needs to change. If self-assessment can be done quicker and with reduced recourse to experts, then the revenues of small businesses, sole traders and the Treasury will benefit.