From confusion over multiple reference numbers to uncertainty over differing year end dates, understanding tax liabilities and paying tax on time can be a minefield for SMEs. In its recent response to the HMRC’s broad Call for Evidence on Timely payment, the Institute of Financial Accountants (IFA) flags up various concerns that must be addressed to better understand and accommodate the impacts on different groups of taxpayers, says the IFA’s Director of Professional Standards, Anne Davis.
As part of the government’s 10-year strategy to build a trusted, modern tax administration system, HMRC’s recent consultation encouraged a collaborative, open and transparent discussion between government and a wide range of stakeholders on the opportunities and challenges of more timely payment of tax. In its response, the IFA collated the findings from 40 of its members, who, on behalf of their SME clients, conveyed one overriding message: the need for greater clarity on the tax administration framework.
COVID consideration urged
Of the 40 tax agents and accountants who provided feedback, there was limited support to increase the frequency of payments to monthly payments, with some of their SME clients having problems paying tax on a quarterly basis based on Making Tax Digital (MTD) quarterly updates. For example, those businesses which have cyclical or seasonal trading patterns or those businesses where working capital is tied up. In fact, IFA members are generally not in favour of expanding the number of Income Tax Self-Assessment (ITSA) payments on account from two to four in the year (55% are against this idea).
It is stressed that any increases in the frequency of payments are only considered if there is a reliable method and information for calculating earlier payments which is not currently the case for some businesses. This is supported by 55% of IFA members agreeing that these payments should be based on the profits of the immediate prior year rather than the current year’s liability.
With the above factors in mind, other considerations for timely payment methods are recommended, such as paying by instalments. However, any changes encouraging early payments should be voluntary, given the financial instability of many smaller businesses.
During a time when many individuals and small businesses are fighting for survival, implementation of any mandatory changes to tax payments is also unlikely to be welcome. It may also be a diversion from other government policy priorities, such as the review of the tax administration framework, implementation of MTD roadmap and further reduction of HMRC’s assessment of the tax gap.
SMEs’ main challenges
Regarding the challenge of current payment timings, a slim majority of IFA members (55%) feel that SMEs have some problems in understanding what tax payments they need to make and when.
New ITSA taxpayers also face challenges with understanding the tax administration system, with nearly 78% of IFA members reporting that clients have difficulty in budgeting for paying tax in the first two years of the business. There is further confusion for clients by having to make payments on account of income tax due.
IFA members are not enthusiastic about accelerating payment dates for corporation tax or income tax (ITSA). Some 45% of members believe a more frequent tax regime should be based on the current year liability and 55% of members believe it should be based on the immediate prior year liability.
Suggestions were made on other reforms that could support bringing tax payment closer to the point of transaction, which show IFA members are almost evenly split over whether ITSA payments should be made on four dates in the year (55%) or retain the current two dates (45%).
A majority of IFA members (67.5%) feel that flat-rate expenses should be restricted to smaller businesses. Also, a large majority (80%) are against flat-rate expenses replacing actual costs. On balance, 54% feel that flat-rate expenses should only act as a proxy for in-year calculations, with the actual expenses used to determine the final amount of tax due.
One recommendation made is for ways to improve clients’ general understanding of their personal or business tax accounts. Nearly 98% of members suggest that by allowing tax agents to access the personal tax account and business tax accounts of their SME clients would help those taxpayers, as it means tax agents would be able to explain the data presented in those accounts.
The Call for Evidence ran until 13 July. The IFA’s full response can be viewed here.