How tax reform can boost the economy and help small businesses


Date: 21 July 2022

HM Revenue & Customs offices

Changes to taxes are often met with hesitancy by small business owners and employees alike. After all, nobody looks forward to the prospect of potentially paying more tax or paying tax on things they originally didn't have to. However, there are times when tax reform can be beneficial for those impacted and certain changes may even boost the economy. One such change is the government's Tax Administration Framework Review , which has the potential to transform the relationship that small businesses have with taxes.

What is the Tax Administration Framework Review?

The Tax Administration Framework Review is a government initiative that aims to make the existing taxation system much more user-friendly. This will enable more freelancers and small business owners to navigate tax returns more easily, facilitating efficiency and accuracy. Any changes resulting from the initiative will be based on the data from a comprehensive survey commissioned by the Federation of Small Businesses (FSB) into taxpayers' experiences.

Why will these changes impact small businesses in particular?

The FSB's survey revealed that small businesses were at a greater disadvantage when navigating the current, complicated tax system. This is because small businesses typically don't have the budget or the time to delve into all the different thresholds, reliefs and tax codes they need to understand to comply with the law.

While larger corporations have entire financial and legal teams to make sure their taxes are in order, smaller operations often rely on the time and skills of just a handful of individuals. As a result, many small businesses pay fines for mistakes in their tax returns or receive penalties for submitting their forms after the deadline has passed.

What role does MTD play in the Tax Administration Framework Review?

Making Tax Digital or MTD was originally launched to solve many of the issues discussed above. While it may have improved the tax return process for some small businesses, the vast majority are still struggling with tax-related administration and expenses. MTD stipulates that all VAT registered businesses must submit their tax return digitally and invest in accounting software . This can automate many calculations and make the organisation of receipts and invoices much smoother.

However, accounting software doesn't take away the need to understand tax regulations, especially when claiming reliefs and expenses. Furthermore, accredited software subscriptions are an extra expense for small businesses to bear. Without sufficient knowledge of how they can reduce their tax bill by capitalising on allowances and reliefs, this additional expense has put some entrepreneurs in an even more difficult position than before.

While digital tax returns are undoubtedly a step in the right direction, there is much more HMRC could improve to make the self-assessment process fairer for small businesses.

What is the government trying to achieve with the new tax system?

A fair taxation system should always have a neutral impact on a business' economic decisions. Currently, small businesses are suffering because of the system as it prevents them from being able to grow as effectively as they might be able to with a more user-friendly system. In fact, many small companies reduce their annual turnover to avoid hitting the VAT threshold of £85,000, preventing them from expanding beyond this point. Ideally, the new system will allow small businesses to flourish and will strip away barriers that impact them unfairly when compared with larger organisations.

What changes is the FSB proposing?

The FSB has small business owners' best interests at heart and, following its survey, has made some recommendations to HMRC. Changes they have proposed include:

  • Increasing the VAT threshold from £85,000 to £100,000 to encourage small businesses to cease revenue suppression.
  • Reducing the tax compliance burden by factoring administrative costs into regulatory assessments.
  • Introducing a 3-year rolling average taxable income scheme to improve small business forecasting and affordability. This will especially benefit new small businesses that experience significant fluctuations in revenue.
  • Expanding investment reliefs to encourage small businesses to invest more into the economy without fearing disproportionate losses.
  • Promoting the existence of tax allowances and reliefs using both MTD software and external resources, allowing more small businesses to have access to this information.
  • Capping the price at which MTD software providers sell their services to prevent unaffordability amongst start-ups and small companies.
  • Ensuring all MTD-approved software does improve the tax return process and does not overcomplicate the self-assessment.
  • Creating free MTD software to provide small businesses with limited budgets better access to the tools they need to file their tax return.

Ultimately, the FSB is seeking to reduce the burden the tax return process currently places on small businesses. This means making the process quicker, more accessible and less costly for those most in need while ensuring every business has an equal opportunity to access reliefs and allowances through educational materials.

Copyright 2022. Article was made possible by site supporter Aislinn Carter.

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