The average UK small business spends £5,000 and three working weeks every year on tax compliance, according to a new report from the Federation of Small Businesses.
FSB research has found that VAT, PAYE and Employer National Insurance Contributions (NICs) are seen as the most time-consuming taxes to manage. The average small business spends 95 hours a year complying with the three collectively.
Due to the complexity of the tax compliance process, more than three quarters (77%) of small firms pay a specialist to ensure their taxes are paid correctly. Almost half (46%) say determining the tax rates at which they're required to pay is a challenge. Four in ten (40%) find exemptions confusing.
The report has also found that tax rules are preventing many small businesses from reaching their potential. Almost half (47%) of small firms polled said business rates have made growing their firm more difficult. The same proportion said corporation tax has hampered expansion, with similar numbers stating that growth has been stifled by Employers NICs (44%). One in seven (14%) small firms said VAT has prevented expansion completely .
"Time and money spent by small businesses on navigating the tax system is time and money not spent on innovating, expanding and creating jobs," said Mike Cherry, FSB national chairman. "The three working weeks and thousands of pounds a year that small firms lose to tax compliance is a huge drain on national productivity."
When asked about changes that would reduce the tax compliance burden, the majority (53%) said they would prefer to pay tax in instalments. A similar proportion (52%) would like to see an early estimation of their tax bill. Four in ten (40%) said that the automation of tax calculations would be useful.
Cherry said: "We hear a lot about the need to simplify the UK tax code. In fact, our priority should be simplification of the tax compliance process. Small firms by and large understand a tax like VAT, for example, but the sheer complexity of VAT administration means they spend 44 hours a year filing returns. It's no wonder the majority end up shelling out for expert help."
Making Tax Digital (MTD), he said, is an opportunity to "radically improve the small business user experience of HMRC". Done right, he said, "MTD could help streamline the process of small business tax compliance. Breaking down the process could also bring benefits. Giving firms an estimation of what tax bills will look like a few months before they're due would help businesses to plan ahead. Equally, the ability to pay in instalments could make managing cash flow more straightforward. The easier taxes are to pay, the easier it will be for HMRC to collect revenue."