Foreword
The UK Government has embarked upon a Tax Administration Framework Review with the aim ‘to design a trusted, modern tax administration system that is simpler, easier to navigate and more responsive to taxpayers’ needs. In order to inform its response to HMRC’s call for evidence, FSB has commissioned a comprehensive, in-depth survey of members’ experiences of the tax system. The survey clearly shows that the current tax system, with its plethora of taxes, reliefs, and thresholds, is too complex, expensive in time and money to comply with, a substantial barrier to growth, and inherently unfair for SMEs. Small businesses do not have the dedicated tax teams and specialist knowledge available to large corporates and consequently they miss out on many reliefs. SMEs face a disproportionate compliance burden relative to turnover.
FSB welcomes the move to reform the tax administration system. The current system is based on the Taxes Management Act 1970 with half a century of subsequent incremental adjustments. It is not fit for purpose in a digital age. The introduction of Making Tax Digital (MTD) was supposed to alleviate many of the issues arising from the hyper-complexity of the tax system, easing tax compliance, increasing efficiency, and aiding cashflow planning for businesses. Yet, just over two years since its initial introduction, small businesses are complaining that MTD has done little to smooth the tax administrative process but has significantly increased their costs of compliance.
In order to be trusted, any new system must not only be fair in design; it must also be fair in operation. With a large majority of taxpayers’ complaints reportedly upheld, especially those concerning automatic, computer-generated charges, the burden of checking liabilities wastes time and resources that could be used to grow businesses. The tax system needs to be fully transparent. Small businesses are now required to use approved software to report to HMRC. For many, the software subscriptions have added significantly to their compliance costs. There is genuine concern that these software subscription costs will continue to
increase as MTD spreads across the different taxes. MTD is a major reform step that will require continual adjustments. We urge HMRC to ensure that its MTD framework is developed to alert small businesses to available reliefs.
A fundamental principle of good taxation is that it should be neutral in its impact on economic decisions, except where deliberately designed for a public-good end, as with the sugar tax. The current system erects significant barriers to growth. Most notably, the current VAT threshold is a major constraint on business growth with many businesses deliberately restricting their turnover to below £85,000. The costs associated with employing people also hinder business expansion.
FSB acknowledges that the Government needs to restore public finances following the sharp rise in public sector debt resulting from the pandemic. We support measures that would reduce the tax gap – all taxpayers should pay the right amount due and MTD should help with this. However, we note that the recent introduction of a Health and Social Welfare Levy adds to the complexity of the tax system and is a tax on jobs, which will impede business growth.
The best way for the Government to bring down the budget deficit, is to encourage economic growth, thereby raising tax revenue. The recommendations put forward in this report are designed to help ensure that the tax system is supportive, not destructive, of growth in the vital small business sector.
Key Findings





Recommendations
Click each recommendation to read more.
Download the full report