Office of Tax Simplification Publishes Report on "Simplifying Everyday Tax for Smaller Businesses"

It’s no secret that the UK’s tax system is complicated. Whether you’re dealing with VAT submissions, managing PAYG and RTI, or preparing your business’ tax return, there are so many tax registration and filing deadlines that business owners need to be aware of.

If you don’t have professional help from the likes of a qualified accountant or tax adviser, it’s easy to see how some small business owners may find the UK tax system overwhelming at times, particularly in the early years when the business is just starting out. Thankfully, the complexity of the UK’s tax system for small businesses hasn’t gone unnoticed.

In May 2019, the Office of Tax Simplification (OTS) published a report "Simplifying Everyday Tax for Smaller Businesses". Following on from an earlier April 2018 OTS business lifecycle review, this latest report looks at smaller businesses, specifically businesses with fewer than 10 employees and an annual turnover of less than £2 million, and how their experience with tax can be simplified.

Some of the key recommendations from the May 2019 OTS report are highlighted below.

Support small businesses, particularly start-ups

The number of small businesses operating in the UK shouldn’t be underestimated. In fact, according to the OTS report, "small businesses make up over 99% of the 5.7 million businesses in the UK." Despite this statistic, small business owners could have more assistance when it comes to understanding and complying with tax matters. For instance, small businesses may encounter a variety of problems when they start-up, such as choosing the wrong business structure, having poor or no record-keeping, or taking on workers without appreciating that those people might be employees. To help avoid running into these issues, and to provide more support during the initial or "pre-formalisation stage" of running a business, the OTS recommends that the government:

"develop and offer small businesses a package of start-up guidance taking them step-by-step through the things they need to do at key stages in the business, with tax as a major (although not the only) focus."

The guidance should cover the needs of different business types and should be designed so that it can be understood by someone with no tax or regulatory experience.

A look at Pay As You Earn (PAYE)

The Pay As You Earn (PAYE) system is used to collect tax from employment and pension income on behalf of employees. This system means that employees that are UK taxpayers often don’t need to file a tax return or pay tax outside of what is taken via PAYE.

While the PAYE process clearly has its advantages, some areas could be improved as well.

The OTS report highlights that "significant criticism" was levied towards the Real Time Information (RTI) aspect of PAYE. RTI is "the process by which employers update HMRC about tax and other deductions from employees’ salaries."

The current system can struggle with the reality of modern working practices, such as dealing with individuals that may have more than one job, or where individuals are both employed and self-employed. There are also around 350,000 duplicate employment records.

However, having more accurate and better quality information collected through RTI could help improve the situation.

In terms of recommendations, the OTS report states that a "strategic focus on the PAYE system should be an HMRC priority to ensure effective implementation of improvements and system changes."

Separately, the OTS also recommends that a "fresh review of areas where the PAYE/RTI system should be improved should be carried out, possibly by the OTS."

Small companies and corporation tax

Corporation tax can be a complex area, particularly for small business owners who may not be familiar with corporation tax reporting requirements or how to go about preparing and filing accounts.

In fact, the OTS recognises that corporation tax "is one of the tax regimes where businesses are least likely to attempt to deal with the tax themselves" and also believes that there is "scope to simplify the corporation tax process."

One concern that the report highlights in particular is the fact that "almost 60% of companies formed since 2010 have needed to do two tax returns to cover their first accounting period: one for 12 months and one for a few days or weeks."

As a result, the OTS has put forward three recommendations, including:

• Developing digital options "to help small companies prepare accounts and tax returns, including use of an optional accounts template that is simple to use and acceptable to HMRC and other departments."
• Simplifying the online corporation tax return process as part of any future extension of Making Tax Digital to corporation tax
• Exploring "ways to reduce the number of companies having to file two tax returns to cover first accounting periods that are very slightly longer than 12 months."

PAYE for the self-employed

Although not one of the formal recommendations, the OTS report also considers there to be "merit in exploring an optional PAYE-like experience for self-employed people."

Unlike employed individuals, who have their tax deducted through the PAYE system, self-employed individuals are responsible for saving for and paying tax to HMRC directly.

According to the OTS report, "a number of the smaller businesses the OTS consulted indicated that they would welcome an optional process under which they could have an appropriate amount of tax deducted from their income each month."

Although the technology to have such a system in place doesn’t appear to be quite ready yet, the report notes that the functionality to support such a system "could be available within a few years."

As a result, a future paper has been earmarked by the OTS, which should consider such a possibility, as well as the option for self-employed individuals to manage their tax payments flexibly. You can read the report "Simplifying Everyday Tax for Smaller Businesses" in full here or find out more about how AccountsPortal tax and other online accounting features here.

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Further Reading

Understanding VAT Thresholds: When Do You Need to Register?

Spring Statement 2022: What it means for small businesses

How to manage the final hospitality VAT rate increase in AccountsPortal