HMRC accepts need for a ‘less confrontational’ tone with SMEs

HMRC accepts that most owners of SMEs want to get their tax right and that the tone of HMRC’s communications with SMEs ‘needs to reflect this better’, the department said in a Budget day note setting out proposed changes to the tax legislation for smaller businesses and how HMRC intends to deliver what David Gauke called ‘an environment in which SMEs can get on with running their businesses’.

Responding to the Office of Tax Simplification’s review of small business tax, the Exchequer Secretary to the Treasury said the government would offer a ‘radically simpler’ way for small businesses to calculate their tax.

‘Businesses will be able to work out their income tax on a cash basis and use simplified expenses rules, rather than always having to follow rules designed for larger business,’ he said. ‘We will also consider options for integrating the operation of income tax and NICs, including simplifying the NICs system for the self employed.’ The government intended to consult on both changes ‘shortly after the Budget’.

‘Over the next three years, I want to see a positive improvement in the relationship between HMRC and small business,’ Gauke added. The department said it was improving ‘commercial awareness training’ for front line staff.

In chapter 2 of Making tax easier, quicker and simpler for small business, HMRC detailed proposed changes to the rules:

• Simpler income tax for smaller businesses – up to three million business will be able to use a new cash basis and standard-rate expenses from April 2013. The OTS suggested that the alternative of a turnover-based tax should be investigated, but the government has decided not to pursue this option;
• Making disincorporation easier – the government will consult on options for ‘making it easier to move out of corporation tax’;
• Improving PAYE for small business – SMEs ‘have told [HMRC] that RTI will help them to avoid building up debt, reduce the end-of-year pressures, and get their PAYE responsibilities right’;
• Making the tax system more transparent – an online Business Tax Dashboard, available from next month, will offer ‘a quick and easy way’ for businesses to see how much tax they have paid and how much they owe. From 2014/15, a new Personal Tax Statement will be available to all individuals who file their self assessment return online and some taxpayers ‘in PAYE’, setting out tax and NICs paid, average tax rates and how the deductions contribute to public expenditure; and
• Integrating income tax and NICs – a detailed consultation on integrating the operation of income tax and NICs ‘will be published shortly after Budget’.

A simpler ‘cash accounts' system would bring ‘huge deregulatory benefits’ to small businesses, said John Walker, National Chairman of the Federation of Small Businesses. ‘Many small firms will already use a “cash accounting” system and so the moves to allow businesses with a turnover of less than £77,000 to use this system will be welcome. What we need to see now is HMRC develop a better relationship with business to ensure tax compliance.’

The ICAEW Tax Faculty noted that the OTS ‘suggested that businesses should only be able to use [the cash basis] if their turnover is less than £30,000, whereas the Chancellor has said that the limit might be set at the VAT threshold of £77,000’.

The higher figure would be ‘welcomed by some’ but was ‘likely to be controversial, not least because of the potential for it to be abused with the consequent risks to revenue’, the Faculty said.