Does Tax Help or Hinder Small Businesses?

Perspectives on Fair Tax

Perspectives on Fair TaxSmall and Medium Sized Enterprises (SMEs) represent over 99% of UK businesses, but research from ACCA (the Association of Chartered Certified Accountants) shows that the ability to alter their established form when the economic environment changes can be the key to continued success.

ACCA’s research paper Perspectives on Fair Tax (244k PDF) indicates that in the midst of the current economic stormy weather, many small businesses are having problems aside from the need to shape-shift, as the complexity of the UK’s tax regime adds to their difficulties.

Specific areas marked as unfair were:

  • the increasing role of employers acting as tax collecting agents for government
  • retrospective changes to the tax system
  • stealth taxes – such as the failure to index link thresholds and allowances
  • and the assumption of additional powers by HM Revenue & Customs.

Chas Roy-Chowdhury, head of taxation at ACCA says:

"A disturbing trend throughout the research is that there appears to be a consistent response from the UK that taxes are unfair, too complex, lack transparency and that there is inadequate communication from the tax authorities".

These views were echoed by a small practice accountant during a UK focus group which formed part of the research, who stated:

"The complexity of legislation, particularly the increase over the last ten years, makes it difficult for laypeople to understand. This complexity creates unfairness and most people are disadvantaged."

Roy Chowdhury adds:

"The more complex a tax system, the greater the amount of opportunities there are for avoidance, evasion, and other forms of abuse, and of course, if the system is easier to use, more non-tax professionals will be able to use it. Therefore simplicity is fundamental to the system."

Participants in the UK focus group also believed that retrospective changes to tax policies, such as the Arctic Systems husband and wife tax case, are unfair. There certainly seems to be a message from the UK in general that the lack of clarity in the legislation combined with increasing complexity and a seemingly aggressive stance by HMRC is leading to a breakdown of trust in the system, as summarised in the following view.

"For tax to be fair and for people to have confidence in it, it has to be simple. It seems to me that the tax legislation … has become so complex in the last three or four years that it’s become inequitable. No one knows now what’s going on. There’s been a mushrooming of legislation: every day [the] Inland Revenue website will be introducing something. I mean, I deal with tax and that’s all I deal with, and I can’t keep up with the deluge of regulations and legislation."

Complexity was seen as a major issue with regard to certainty and thus fairness. The research suggests that the chief contributing factor to complexity, was the volume of directives, laws and regulations. Therefore, the key message for the government that arose from this study is the need to reduce, or at least contain, the volume of directives, laws and regulations in order to moderate complexity.

Roy-Chowdhury concludes:

"For SMEs to survive they needs a tax system which is clear, understandable and they also need a tax authority with which they feel they can communicate clearly. The clear message from our research is for governments to reduce the volume of laws, directives and regulations that contributes most to complexity. There is a fundamental issue for governments around the world to decide the purpose and structure of tax systems, and importantly to communicate the rationale behind these decisions, especially to SMEs who may be feeling nervy due to the current economic climate."

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