The Forum has written to David Gauke, the Exchequer Secretary to the Treasury, to complain about HMRC's ‘harassment and mistreatment' of small businesses, including imposing steep fines for even slight delays in tax bill payments as well as records errors or omissions, while at the same time agreeing ‘sweetheart deals' with some of the UK's largest companies.
Recently the Public Accounts Committee estimated that unpaid taxes from big businesses could amount to more than £25 billion, prompting the Prime Minister, David Cameron, to pledge action on tax avoidance.
However, in September 2011, following a pilot exercise in which just 12% of firms displayed ‘seriously inadequate' paperwork, HMRC extended its small business records checks project, meaning 20,000 firms are in line for visits from the taxman in 2012-13.
In addition to facing potential fines of up to £3,000 for records deemed inadequate, firms are being forced to negotiate ever more costly red tape at a time the Government is pledging to reduce bureaucracy.
The not-for-profit Forum's latest ‘cost of compliance' Referendum survey, carried out in July 2011, showed tax administration is now the main regulatory burden for small business owners, leaving them with a bill of £5.1 billion per year.
While HMRC's SME strategy covering 2012-13 and 2014-15 warns of an increase in ‘potential rule breakers' – estimating 28% of SMEs could be found to have poor records – it recognises that 88% of business tax red tape falls on SMEs.
The Forum is arguing HMRC's clampdown flies in the face of the Government's plans to reform small business regulation in order to free firms to act as a catalyst for economic growth.
The pilot record checks scheme showed 44% of small firms experience problems with record keeping. The Forum believes these struggling businesses, which are facing up to extremely difficult trading conditions yet are expected to create jobs and drive growth, should be offered better advice, guidance and support rather than threatened with steep fines, which are also being imposed on small firms forced to pay their tax bills late as a result of cash flow difficulties.
The Forum's Chief Executive, Phil Orford, said:
"Small businesses want to keep proper records but struggle with the significant administrative barriers that exist in the UK. They also want to pay their tax bills on time but the reality is that many firms are struggling with cash flow in extremely tough economic conditions - yet HMRC is being completely inflexible.
"Entrepreneurs are crying out for a better tax regime that supports their ambitions and is conducive to growth, not one that provides constant hurdles to overcome and punishes them disproportionately.
"Operating such a strict, punitive small business records checks regime while effectively allowing large companies to do as they please is completely unfair.
"Given that the project is creating so much additional red tape, the Government is in danger of seriously undermining its own deregulatory agenda and damaging small firms, particularly in the present economic climate."
Mr Orford warned business owners to be prepared and, wherever possible, proactive.
"Obviously entrepreneurs will want to make sure they are not caught out and hit in the pocket at a time they can least afford it, but it is advisable to try to focus on creating business intelligence that works for you, that you can use to your benefit - for example in securing finance - rather than just keeping records for the tax man because you have to," he said.
Firms are expected to keep records going back at least six years. Information including invoices, bank statements, receipts and cheque stubs will have to be supported by up-to-date accounts books and detailed analysis.
Many entrepreneurs will be dismayed that HMRC is taking a tougher approach to small businesses over administrative issues when it appears to have so many of its own.
The Forum's submission to the Treasury sub-committee inquiry into ‘the administration and effectiveness of HMRC' identified numerous weaknesses in the organisation's service.
Small businesses believe HMRC's administration of the UK's tax system is slow and inefficient, with many online systems deemed too complicated.
The Forum has called for reforms to PAYE, the speed of HMRC's internal procedures and the treatment of customers. In addition, as part of its headline Get Britain Trading campaign, the organisation wants a major root-and-branch simplification of the tax system to make it easier for small businesses to negotiate their tax responsibilities – which HMRC says is its ‘main aim'.
The sub-committee's report identified serious concerns in a number of areas, including:
- Unacceptable difficulties contacting HMRC by phone during peak periods;
- Endemic delays in responding to post;
- An increasing focus on online communication that may exclude those without reliable internet access.
Forum member Geoffrey Rogers, of Geoffrey Rogers Chartered Accountants and Tax Consultants in Plymouth, argued that small firms want to comply with their tax requirements but are not being given enough support.
"It's typical that HMRC is going to fine small businesses for not keeping ‘proper records' when it does not offer any real definition of what this means. Without clarification, and certainly without better education, in many cases, fining small businesses for poor record keeping would be like punishing a child with learning difficulties for poor reading.
"Once again we are looking at the big stick being favoured instead of the carrot, which is, I'm afraid, typical of HMRC's current approach."
HMRC said it intends to review the records checks project but would continue with a ‘limited number' of pilot checks, with the results to be evaluated as part of the review.
For more information about how to keep better records business owners should see the Forum's hot tips. Free tax and PAYE tools can be accessed here.
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