Small businesses ‘dismayed’ at HMRC plan to tighten tax rules
Small businesses are “dismayed” at the prospect of tax rules being tightened under new proposals set out by HMRC.
The rules, which are subject to a consultation, would require close companies, which are defined as firms controlled by five or fewer individuals, to provide HMRC with details of all transactions between the company and its participators.
This would include all cash withdrawals, loans, debts, dividends, other distributions and transfers of assets to and from the company.
But the Federation of Small Businesses (FSB) has warned that the new rules risk pushing up compliance costs and creating more confusion for small business owners.
Tina McKenzie, policy chair at the FSB, told City PM: “Every business ought to pay the correct amount of tax, but the UK’s tax system makes this basic task far, far more confusing and stressful than it should be.
“Small business owners will be dismayed at the prospect of even stricter investigations, when current tax probes can take years to resolve, with all the worry, expense, and uncertainty for the business being targeted compounding over time.
“HMRC must not pile more reporting requirements and red tape on to small firms and self-employed people.”
One founder of a fledgling business in the City added: “I now get why some would rather face the drone attacks in Dubai’s financial district than the put up with the UK’s drift towards surveillance-pseudo capitalism.”
HMRC points to tax gap
McKenzie suggested that the tax collector should instead look to its own customer services and its own guidance, which is not designed with the average small business owner in mind.
Small firms lack huge accounting and tax compliance departments, she said, adding that a simple tax-related query “turns into a Kafkaesque nightmare” due to confusing guidance and unanswered calls to HMRC.
HMRC has said the new rules are necessary to reduce tax avoidance by small businesses. According to the government body’s projections, as much as 60 per cent of the tax gap – a measure of the shortfall from expected tax receipts – can be attributed to small businesses.
The tax collector argues close companies are to easily structure their affairs to minimise the tax charge on participators, ranging from “benign planning to aggressive avoidance.”
Tax law expert Dan Neidle told City PM: “Requiring small businesses to report cash payments with participators seems sensible and should be low impact.
“But requiring them to report in a way which engages with all the technical rules around close companies would be extremely burdensome.”
HMRC has insisted that the government “does not want to impose any greater administrative burden than necessary.”
“Small, self-run and family-owned businesses play a vital role in the UK economy,” HMRC said.
“The government recognises that the majority of such businesses seek to operate responsibly and comply with their tax obligations.”
The consultation began on 19 March with respondents given until 10 June to make a submission.