UK: Fear of HMRC stalks small businesses
03 July 2012
Posted by: SAIT Technical
By Roland Gribben (The Telegraph)
Owners of small businesses live in fear of HM Revenue & Customs throughout the whole of their working life, according to the results of detailed research carried out for the tax authority.
They are haunted by worries about tax mistakes that will result in a visit or inquiries from the taxman, although many say they find HMRC to be more helpful and less "scary” than they imagined.
However, some entrepreneurs are frustrated by difficulties in getting clear and simple answers to questions. Just under a quarter said they had problems in obtaining a definite answer to a tax question, 30pc said they had difficulty making sense of the information given by HMRC and "only 45pc agree that they have confidence that HMRC staff give the right answer to their questions”.
"Whilst many have experienced no problems, some small businesses can be disappointed in the quality and clarity of the response they get to questions from HMRC. This can cause significant frustration and increase reliance on other advisers,” the report reads.
HMRC is reviewing procedures to see how it can provide a more helpful approach. The survey covered a cross-section of Britain's smallest companies with fewer than
10 employees, less than £1m turnover and which handled most of their tax matters without outside help.
The research, carried out for HMRC and the Office of Tax Simplification by The Futures Company, formed part of a small business taxation review that has contributed to proposals for easing the burden on micro companies by providing incentives to help pave the way for them to switch from limited company to less onerous sole trader status.
Researchers found that nervousness about contact with HMRC extended even to those who did not find tax difficult because there was an underlying fear of "getting things wrong”.
Almost 50pc of small businesses worried that they may have made a mistake even though they kept good records, while 38pc were concerned about being investigated and fined for mistakes they may have made.
Horror stories about inquiries and fear of penalties "can make small business owners overly anxious”, according to the report.
Levels of anxiety are lower – although still significant – for those using an agent to help with tax administration, and, while confidence grows, "the fear of HMRC remains throughout the lifetime of a business”.
The most common issues are understanding tax issues involving expenses and "making sense of the forms and information coming from HMRC.” Most businesses have only a few tax obligations but a significant number struggle to deal with them.
"Lack of confidence exists across different levels of complexity of business set-ups,” the report adds.
Nearly half the companies said they had difficulty knowing what was allowed as a claimable expense. Most of them wanted HMRC to provide rules of thumb or fixed rates for different types of business to ease some of their headaches.
A test carried out by the survey team highlighted some of the problems. Asked how they would treat office furniture or a computer needed for the business, 42pc gave the wrong answer. Only 27pc chose the correct option - claim capital allowances or the annual investment allowance.
When asked which sales or income they included in their accounts or tax return for the year only 25pc gave the right answer – sales invoiced in the year whether or not they had been paid for.
There was also confusion over claims for items needed for business and personal use. One in five said they would claim nothing even though they used the item for their business while 35pc who used their home for business or to do paperwork did not submit a claim.
The report says that experience of dealing with HMRC is often more positive than anticipated while misconceptions are common. "In reality people often find HMRC to be more helpful and less 'scary' than they imagine.”
HMRC is seen as a key source of information in the business start-up phase but there is a "strong desire for more proactive contact including updates and reminders between deadlines.”
Suggestions for improvements in HMRC services included email responses within a set time frame, a dedicated small business phone line while a "more empathetic and flexible approach from HMRC would also be welcome.”
The survey teams also found that control is a key factor for starting a business. Many people were motivated by lifestyle but only a few were influenced by "pure entrepreneurial drive.”
A third wanted to be independent rather than work for someone else, 23pc started off on their own when unemployed or redundant, 18pc wanted to fit work flexibly around other commitments and 12pc were making money out of what had began as a hobby.