Jennifer Thomas. Photo: Thomas Symington, Symington Photographics.
Jennifer Thomas elaborates on a FSB report’s conclusions to ease the tax administration burden on small business owners. Jennifer is the FSB's development manager in Northamptonshire.
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Published on behalf of
SMALL business owners frequently express concerns about tax and The Federation of Small Businesses’ latest report Taking A Toll addresses these issues while suggesting practical solutions.
The report reveals that small firms spend an average of £4,500 and 44 hours annually on tax compliance.
This cost includes contacting HM Revenue & Customs, managing compliance and expenses related to software or external accountants.
One major challenge identified is poor customer service from HMRC, making tax compliance more stressful and time-consuming.
Over half (52%) of small firms find it difficult to contact HMRC and, while the telephone remains the most popular communication method (used by 68%), only 23% of users rate their phone experience as satisfactory.
Consequently, 60% of small business owners report increased stress levels when dealing with HMRC.
HMRC’s Making Tax Digital programme is expanding. From April next year, businesses with turnovers above £50,000 must transition to MTD for income tax self-assessment, while those with turnovers between £30,000 and £50,000 have until April 2027.
However, 27% of small businesses that will need MTD-compatible software remain uncertain about their adoption plans, indicating a potential digital gap.
Making Tax Digital for Income Tax
Self-employed individuals and landlords with incomes over £50,000 must comply with MTD ITSA from April 2026, while those earning over £30,000 have until April 2027.
The latest budget confirms that individuals with incomes of £20,000 or more will need to comply by April 2028.
Digital record keeping
Businesses and individuals are required to maintain digital records of their income and expenses using MTD-compatible software.
Quarterly reporting
Instead of filing a single annual tax return, businesses must send quarterly updates to HMRC via their software.
Final year-end declaration
Following the quarterly updates, a final declaration (similar to an annual return) is submitted to confirm the figures.
FSB has been actively involved in the MTD initiative, aiming to support small businesses through the digital transition while advocating for reduced burdens.
In partnership with Rhino Software, the FSB offers an HMRC-recognised MTD app tailored for small businesses. This app supports VAT return submissions, record-keeping, invoicing, and expense tracking, all accessible via mobile devices.
FSB members benefit from a complimentary first VAT return submission and discounted ongoing use.
Through reports such as Taking a Toll, the FSB has voiced concerns over the costs and administrative challenges associated with MTD and continues to urge the government to raise awareness of tax relief options and encourage competitive pricing from MTD software providers.
The FSB has been actively consulting with HMRC over a number of years to address the difficulties small businesses encounter under MTD. This includes advocating for monitoring software costs to keep digital compliance financially viable and arguing that MTD may not be feasible for everyone and calls for exemptions where appropriate.
FSB’s Recommendations for Improvement:
- Reduce tax administration costs: Set a target to lower business tax administration expenses by a third by 2028, reducing the average cost from £4,500 to £3,000. Including HMRC in the government’s economic growth initiatives is essential.
- Duty of candour for compliance officers: Require HMRC officers to be transparent about mistakes and inform businesses of their rights at the start of investigations to build trust.
- Time limits on tax investigations: Enforce a limit on the duration of HMRC tax investigations to prevent excessive delays, which can cause financial and emotional stress.
- Regulate MTD software pricing: Review and potentially regulate the pricing of MTD-compliant software to protect small businesses from excessive costs.
- Improve HMRC response times: Set and maintain a 15-day response standard for most tax queries, with a statutory maximum of 30 days, and include response performance in annual reports.
For FSB members reading this, remember that support and guidance are available to help navigate these ongoing challenges, including the Tax Investigation Protection and a dedicated Tax helpline, included in membership.
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