Tax compliance costs small businesses nearly £25 billion a year, while three in five small business owners report that dealing with HMRC has increased their personal stress.
The findings, from a survey of over 1,400 small business owners, come from a new report by the Federation of Small Businesses (FSB), Taking a Toll: Small businesses and the cost of tax compliance, published today.
The report tallies up the demands – in terms of stress and time, as well as the financial costs – levied upon small business owners when they engage with the tax system.
These costs fall not just on small business owners; by holding back productivity and reducing the time and funding small firms have for investment, they are also hampering overall economic growth.
The average small firm spends £4,500 and 44 hours a year on tax compliance, according to the research. These annual totals could include time spent trying to contact HMRC, the cost of staff time used to manage compliance, and the price of software subscriptions and/or an external accountant, among other outlays.
Poor levels of customer service from HMRC are a recurring theme within the report, making tax compliance, already a demanding task, even more difficult and stressful, and using up time that would be far better spent developing business operations.
More than half (52%) of small firms find HMRC difficult to contact. The telephone was the most popular method of communication with the tax authority, used by over two thirds (68%), but only a quarter (23%) of that group rated their experience of dealing with HMRC over the phone as good.
Given that, it is not surprising that three in five small business owners (60%) say that dealing with HMRC has raised their personal stress levels.
HMRC’s ongoing Making Tax Digital (MTD) programme, which aims to move businesses over to filing their taxes digitally, will be expanding its net as of April next year. After that date, all businesses with turnover above £50,000 will be required to have moved over to MTD for income tax self-assessment, while those with turnover between £30,000-£50,000 will have until April 2027 to make the switch.
Despite this looming deadline, over a quarter of small firms (27%) who will be caught up in MTD eligibility say they do not know when they plan to adopt MTD-compatible software, driving concerns of a digital gap.
Tina McKenzie, FSB’s Policy Chair, said:
“Tax compliance is far from a niche issue – it affects all five and a half million small businesses in the UK, costing them £4,500 and 44 hours a year each on average. Collectively, that adds up to an annual total cost to the small business community of nearly £25 billion and over 240 million hours.
“This is money and time that could be far, far better spent on building up their business, and the overall cost to the economy in terms of lost growth and wasted productivity is enormous.
“Given the challenges facing the economy, and the need for growth, reducing the burden placed on small firms by tax compliance must be a priority – something the Government has recognised as a priority for other regulators. HMRC should be included in the Government’s drive to make regulation better support growth.”
Recommendations
The report sets out a series of recommendations to make the tax pill easier to swallow for small firms, and to help make the system of business tax collection and compliance simpler and easier for everybody involved, including:
- Setting a target to reduce business tax administration costs by a third by 2028. Aiming to bring the average tax compliance cost of £4,500 down to £3,000 can be achieved – HMRC should set a target to track this cost, and publish annual updates. HMRC should also be included in the Government’s drive to make sure that regulators do their utmost to support economic growth. The Government’s determination to make sure that regulators should look at their operations to find ways to nurture growth is badly needed, and should be extended to the tax authority as well, given the vast amounts of time and money businesses spend on compliance and administration.
- Imposing a duty of candour on HMRC’s tax compliance officers. This will require officers to be open and honest about mistakes, and to inform a small business owner under investigation of their rights within the tax investigation process at its outset as well as the full consequences of any concessions made, helping to build trust between tax collector and taxpayer.
- Setting a time limit on the length of HMRC tax investigations. Currently, full enquiries on average can take up to 18 months to finish; however, this is not strictly enforced, and some small businesses have undergone tax investigations that have taken years to be resolved, which comes at a cost of great financial and emotional stress, but also limits HMRC resources. , Investigations that go over the time limit period will need strong justification for doing so.
- Reviewing the pricing of Making Tax Digital-compliant software as part of the evaluation of the programme, and, if needed, introducing regulation to limit price increases. With small businesses mandated to comply with Making Tax Digital for Income Tax from 2026 and 2027, many small businesses will be signing up for MTD software for the first time, and given their small size, could be reliant on regulatory protections so that they are not subjected by software providers to excessive and unavoidable price increases.
- Enforcing shorter timescales for HMRC to provide responses to taxpayers, and publishing the outcomes each year in its annual report. FSB recommends that HMRC should meet the performance standards it has set internally for most tax queries, which is a response time of 15 days and a statutory limit of 30 days.
Tina McKenzie added:
“Reducing the cost of tax admin by a third isn’t an unrealistic goal, but it will require a massive effort from HMRC to improve its customer services, and to upgrade its systems to make them more user-friendly.
“Any business owner will tell you how stressful it can be to try and get a resolution from HMRC to a problem or a concern related to tax, and our survey found widespread dissatisfaction with levels of customer service at the tax authority.
“With HMRC in the process of recruiting 5,000 new compliance officers and 1,800 debt management staff, improving customer service must not be ignored or set aside. With HMRC putting more resource into investigations, small businesses need to know that they will be able to get updates and answers from HMRC swiftly and easily. Investigations must not drag on for months and months, either, as the disruption and stress this causes – often unnecessarily – is incalculable.
“Failing to upgrade HMRC’s communication channels and response times will add to the already huge toll tax compliance takes on small business owners’ mental health.
“As the Making Tax Digital agenda advances, drawing more small businesses into its reach, the argument for making HMRC easier to engage with becomes even more urgent.
“We all deserve a tax system that is fit for purpose, overseen by a tax authority which takes steps to make compliance as simple and painless as possible. But at the moment, many small businesses encounter just the opposite.
“We have set out an agenda for reform – now it’s up to HMRC and the Government to take up the challenge. Getting tax right will unleash small firms’ productivity, helping us get the growth we need.”
