Future of Tax - Q1 2023

WRITTEN BY Joanna Rowland Director General for Transformation, HMRC

Building a digital future for tax to make it easier for everyone

Digitalisation of business records and tax administration is already helping UK businesses keep better control of their finances, reducing errors and saving them time.

Most of us are already banking, paying bills and interacting online, so going digital with business records and taxes is the next step.

Transforming online tax services

In HMRC, with the help of partners across the finance and software sectors, we’re transforming the way we deliver services for tax and customs to make it easier and quicker for everyone.

We’re redesigning processes around the needs of individuals and businesses so that they can get their tax affairs sorted online or via our app, saving time by not having to call or write to us.

Our app allows users to check things like their tax code and National Insurance number or claim a refund if they think they’ve paid too much tax. Download it for free and give it a go; simply search ‘HMRC app’ on your mobile devices.

We’re also building HMRC systems that can directly interact with business software so that keeping digital records and filing tax returns as part of Making Tax Digital (MTD) is as easy and seamless as possible.

If a business uses compatible software to keep track of finances, they can easily file a tax return as needed, as all the information is already available to submit.

Businesses now using compatible software

Filing VAT returns through software is already the standard way for VAT-registered businesses to do their tax returns. Nearly 2 million VAT-registered businesses are keeping their VAT records and filing their returns in this way; and last year, more than 8 million VAT returns were successfully submitted through compatible software.

Benefits of going digital

Keeping digital accounts and records has many benefits. Independent evidence shows that using MTD-compatible software is reducing avoidable errors and making it quicker and easier for businesses to manage their VAT affairs and keep control of their finances online.

For more information and to find a list of compatible software, go to GOV.UK and search for ‘Making Tax Digital for VAT.’

Digitalising income tax

From 2026, some Self Assessment customers will also be expected to use software to submit tax returns.

We’ll work closely with self-employed individuals and business owners to ensure there are plenty of opportunities for them to get involved before it’s mandated, so they can feel confident and ready to maximise the benefits of managing their business records and tax affairs digitally.

If a business uses compatible software to keep track of finances, they can easily file a tax return as needed.

Companies urged to join the tax data digital revolution

The taxation landscape is undergoing a major transformation whereby authorities are scrutinising more than ever, and digitalisation is a necessity, especially for forward-looking companies.

How to improve data quality

Although tax technology is available to produce data that will allow organisations to strategise and be at the forefront of tax, uptake remains slow. Rahila Zahin, Senior Technical Solutions Consultant for automated finance solutions company ARKK, believes that for many, tax automation is still a new concept.

“I think there is a bit of a gap in the market in terms of knowing where to start,” she says. “There have been tools out there for years, but they require perfect data — which 99% of businesses don’t have.”

“However, there are technological platforms out there, like ours, that offer wide-ranging benefits such as improving data quality by ‘wrangling’ it, making it clean for purpose.”

Get on board with automation

While some chief financial officers have already switched on, Zahin urges colleagues not to delay. There are many missed opportunities by not adopting.

Automation can help firms create goodwill with tax authorities and auditors as otherwise, they are more likely

to report incorrectly or don’t have the visibility or tools to handle data, ultimately leading to unwanted fines and penalties.

Using an automated platform means less manual handling of reporting and can help retain staff because it wipes out much of the boring parts of the job, freeing them up to do the interesting work requiring a human brain and judgement.

Flexible strategy benefits

Those that have taken the plunge have found tasks are much more time-efficient and easy. One company found that its data formatting process — which normally takes four hours — now takes only 30 minutes.

The ARKK platform is data agnostic, meaning it can work with any system. It’s flexible and built around a customer’s specific needs and has Machine Learning, AI and Power BI embedded. It can act as a data repository and provides accountability; and by creating a collaborative working environment, it provides ownership of numbers for all the stakeholders involved. It offers easy traceability for any transaction and allows for more future planning.

“Our platform has multiple use cases, and we have found that clients whose initial scope was just to automate their VAT returns, for example, soon discover more use cases for themselves,” says Zahin.

INTERVIEW WITH

Rahila Zahin

Senior Technical Consultant, ARKK

Paid for by ARKK

Tax data management is still largely a manual process and with businesses struggling to cope — now is the time to harness digital platforms to take the load off.

WRITTEN BY

Sheree Hanna

Tax at the forefront of change

At the end of last year, Mazars surveyed more than 800 executives from 27 countries around the world for our annual C-suite barometer. Our research showed leaders’ fighting spirit, optimism in the face of ongoing challenges and confidence to invest in and shape a sustainable future.

While recognising the significant challenges of 2022 — including ongoing inflation and economic instability, high energy prices, geopolitical tensions as well as the lingering effects of the pandemic — it was heartening to see respondents are optimistic about the future.

Transforming technology and developing sustainability strategies top the list of strategic

priorities and, as a result, leaders are boldly investing in these areas, along with attracting and retaining talent, and keeping gender equity high on their agenda to ensure their organisation is fit for tomorrow.

Tax is the one certainty all businesses face, and it remains a topic at the forefront of negotiation and debate, driving decisions on policy, trade, strategy and business transformation. As tax leaders face new challenges in an ever-changing landscape, we discuss the impact of technology and sustainability on the tax environment as we look to prepare businesses for the future.

Tax incentives need to be better focused to facilitate economic growth

Tax expert says there needs to be more awareness and clearer policy focus around innovation incentives that can boost company growth.

Businesses seeking to grow through innovation, which play a part in boosting the national economy, need more clarity around the objectives of current tax incentive regimes.

According to Gary Collins, Tax Partner and Head of Innovation Incentives for Mazars — a leading global accountancy and advisory firm dedicated to helping companies make the most of business opportunities — there are a lot of mixed messages about the support available.

Working nationally and internationally, his focus is on innovation, and he advises clients on incentives delivered through the tax system such as research and development (R&D) tax credits and the Patent Box regime — designed to encourage companies to keep and commercialise intellectual property in the UK.

Make tax incentives encouraging Collins says: “When we talk to clients, at one extreme are people who are fully aware of what support exists but are not utilising it, which defeats the objective of having incentives if companies aren’t encouraged to use them.”

“At the other extreme are those who are making, or want to make claims, but feel the regimes are difficult to navigate and need support. Even amongst those companies, there is a lack of clarity on the policy objectives.”

He asserts that the fundamental problem seems to be that the regime around R&D does not align with any other policy initiatives. “It basically exists to provide money to support scientific and technological innovation, but it doesn’t say what outcome it is seeking to achieve.”

For example, he explains: “Most leading economies around the world have, within their tax regimes, an incentive system which is very much focused on net zero, or ‘green’ policies,

but our tax system currently doesn’t — although all the tools are in place.”

Instilling clear objectives

Recent rule changes have been proposed to encourage startup companies to undertake R&D activities in the UK which implies the Government is keen to develop jobs within the innovation space.

“That is a good objective and one we can identify with, but it is more implicit than explicit,” he says. “A lot of publicity around the R&D tax regime has recently been quite negative because it is perceived there is considerable abuse of the scheme whereby some taxpayers are making claims when they are not entitled to do so.”

Collins adds: “This whole issue around abuse and avoidance will never be completely eliminated, but a good starting point would be to have clarity over the objectives. The benefits of the regime could then be targeted at particular businesses and the scope for dubious claims thereby reduced, as well as hopefully producing greater payback from the support by incentivising more innovation.”

Looking ahead

In the recent Spring Budget, incentivising innovation was referenced in several announcements, most notably on R&D tax reliefs, but also within the support for emerging digital technologies and the reforms to audio-visual tax reliefs.

Collins concludes: “It was reassuring to see a Budget that was full of references to the importance of innovators and the creative industry in developing wealth for our nation — and that recognises a need for the state to have a role in supporting these activities.”

INTERVIEW WITH Gary Collins Tax Partner and Head of UK Innovation Incentives

INTERVIEW WITH Catherine Hall Head of Tax, Mazars

SPREAD WRITTEN BY Sheree Hanna

Utilising sustainability initiatives to drive business value

As tax affairs and behaviours come under increasing scrutiny, more companies are seeking support from specialists to ensure a future of compliant expansion, that fits alongside their approach to the environment, society and governance (ESG).

Big changes sweeping through the tax and reward landscape means that companies need to be better prepared to ensure they can drive success along a road often potholed with reputational risks.

The past decade has witnessed a change in gears from where organisations previously sought to minimise tax bills to now focusing on how tax behaviours align with culture and sustainability to attract and retain the best talent.

Transparency in tax affairs

HMRC has stepped up scrutinising tax affairs. This has prompted a shift towards greater transparency and diligent reporting. This willingness to be more compliant has no doubt also been ignited by today’s ‘naming and shaming’ culture, made evident with companies and individuals being brought to account on expenses, employment status (IR35), National Minimum Wage and the Covid-19 financial support schemes (including furlough).

The Covid-19 pandemic has marked a change in how people want to work (be that home, the office or overseas). Consequently, companies have started to fall more into two distinct camps — protectionists (get back to the office) or internationalists (work from anywhere).

There has been a war for talent ensuing too, making the approach to tax and sustainability an even more critical area for future growth, recruitment and success.

Reaching environmental, social and governance goals

“There are many approaches, but from a practical perspective, I have been helping organisations to think about how they can best support their employees and attract future talent through taking tax governance seriously and realigning their reward strategy with their ESG approach,” he explains.

Ways to help employees

Already, many businesses are updating travel policies to incorporate hybrid working, as well as electrify vehicle fleets (reducing tax bills for their employees). Businesses can also consider ways of supporting workers with energy bills and childcare to further help with staff retention.

Changes in immigration rules and Brexit have made effective recruitment strategies difficult to navigate and drive forward. With the right support, companies could look at how they can attract and develop talent through training schemes as well as how they recruit from outside the UK.

Sustainable growth will be driven by attracting and retaining the right people, but having a critical eye as tax inspection and wider behaviours intensifies.

“Given there are so many tax and reward risks organisations must deal with — for example, benefits, travel costs, national minimum wage and off payroll contractors — gaps between specialisms and responsibilities can leave potential exposures. It is therefore vital to establish clear governance and policies. Further, there is likely to be a rise in the role of the ‘Chief Tax Officer’ position to integrate tax with other parts of the business and with automation and technology,” says Goodwin.

Find out more at mazars.co.uk/ Future-Of-Tax

Ian Goodwin, Employment Tax and Reward Partner at Mazars is well aware of the increasing pressures on companies to find and retain the right talent, but also to grow and drive overall value for their businesses.

“The future can be green for businesses when they make sure their reward and approach to tax aligns with their sustainability strategy.”

INTERVIEW WITH Ian Goodwin Employment Tax and Reward Partner

All statistics mentioned were taken from the latest Mazars C-suite barometer, an annual survey conducted with C-suite executives from across the world.

Tax and technology can be a great partnership for processing data

It was less than 23 years ago that the first UK tax return was filed online. We’ve come a long way since then. But the potential of technology to change our tax system still has a long way to go.

The Government’s 10-year strategy paper, published in 2021, highlights their plans: more use of third-party data, more effective pre-population of data and more timely uploading of data.

Tax administration

While Making Tax Digital (MTD) — with its requirement for self-employed businesses and landlords to keep digital records and report their income quarterly — gets most of the attention, the more useful element for taxpayers promises to be the Single Customer Account.

This is the plan where every taxpayer will eventually be able to see and manage all their tax affairs, including all the data HMRC hold on them, through a single digital account, removing the need for annual tax returns.

This project sadly remains well behind schedule; however, if the recent tax app is anything to go by, then if and when the Single Customer Account is realised, it should be a game-changer.

Moreover, HMRC will need to ensure data is accurate and secure and that taxpayers who struggle to access services online are protected. Their delivery of Covid-19 support schemes was impressive, but it also showed up holes in their data.

Clear tax policies are needed for climate action

WRITTEN BY Susan Ball President, Chartered Institute of Taxation (CIOT)

One benefit of MTD should at least be to give HMRC an up-to-date picture of business trading and profitability levels, so they can deliver schemes like the Self-Employment Income Support Scheme more comprehensively in the future — and with less risk of abuse.

Tax compliance

Technology is a big part of HMRC’s plans to reduce the ‘tax gap.’ It remains to be seen whether MTD will reduce taxpayer error.

But an area where there is undoubtedly potential is using data analytics to analyse the large amount of data they now have access to — including from banks and other tax authorities — in order to identify and target illegal activity.

Tax is not just about raising revenue; it can also be a powerful way to influence behaviour. Sadly, current policies leave something to be desired when it comes to tackling the climate crisis.

Tax has been used as a tool to influence behaviours for centuries. High taxes discourage certain behaviours while tax reliefs can encourage them. But when it comes to the climate crisis — an area where we need big behavioural changes — tax policy is not always effective.

Go electric

Take road tax — or vehicle excise duty (VED), to be precise. To encourage drivers to switch, electric cars have been exempt from VED since 2001. But is this small annual saving enough to affect decision-making?

WRITTEN BY Helen Thornley Technical Officer, Association of Taxation Technicians (ATT)

lower rate can be lost. This means it can be more tax-effective to retrofit materials than install them upfront as part of a bigger project.

Carbon capture

Even worse, current tax policy can stand in the way of people making positive changes. A healthy, squidgy peat bog accumulates carbon dioxide, while a damaged, drying bog releases it.

Tax policies

One under-explored area is the impact technology will have on what and how we tax. One suggestion is it could open more opportunities for ‘taxing as you go’ on a transactionby-transaction basis, for example for people who work via platforms.

Technology, including blockchain, might also make environmental taxes such as a carbon border adjustment mechanism more feasible, as well as having a role in areas such as transfer pricing.

Or is it simply a bonus for those already intending to make the switch? We don’t have evidence for how effective this policy is and, with an estimated 660,000 electric cars now on the road, it is no longer sustainable. From April 2025, electric car owners will have to start paying VED simply to keep revenues coming in.

Repair or refurbishment

Sometimes incentives are simply inconsistent. The installation of energy-saving materials such as insulation or solar panels can benefit from 0% VAT. However, the savings only apply where these items are installed separately.

If you want to use energysaving materials as part of a larger refurbishment, the benefit of the

Much of the UK’s peatland is damaged, and the Government wants to restore 280,000 hectares of it by 2050 to provide climate, water quality and biodiversity benefits. But landowners who want to change how they use their land risk losing valuable inheritance tax reliefs. This is a massive disincentive and a significant barrier to getting more land into schemes that could help reduce and absorb carbon emissions.

Green taxes

In January, a governmentcommissioned review, Mission Zero, called for a review of how tax policy could incentivise decarbonisation. If we want to make meaningful progress in tackling the climate crisis, then tax is an important lever, but the Government needs to carry out a serious, strategic review to deliver coherent, consistent policies which will deliver real change.

The installation of energy-saving materials such as insulation or solar panels can benefit from 0% VAT.

One under-explored area is the impact technology will have on what and how we tax.

Compliant or complacent? Preparing for the future of e-commerce

Manual VAT processes are no longer sustainable, and e-commerce and finance systems don’t have all the functionality needed to be compliant in the face of fast-paced change.

Alternative growth channels

Almost 900,000 UK businesses are now using marketplaces to maximise online sales. While marketplaces offer a fast route to market without investing in a dedicated e-commerce site, there are also specific VAT and indirect tax burdens for both marketplace operators and sellers. Vertex research found that both marketplace operators and sellers are confused about who is actually responsible for collecting and remitting VAT. Sellers are unsure when and where they are liable for indirect taxes and at what rates.

Additionally, the accuracy of indirect tax calculations is a common issue — partly due to EU rules becoming increasingly complex. Despite marketplaces being a vital channel for growth, 7 out of 10 sellers agreed that indirect tax challenges could deter them from continuing to use marketplaces.

E-commerce has boomed over the past decade thanks to an increased appetite by both businesses and consumers to buy and sell goods online.

WRITTEN BY Peter Boerhof Senior VAT Director, Vertex

Global e-commerce sales are expected to reach USD8.1 trillion by 2026, compared to around USD 5.7 trillion last year. Large organisations continue to adapt to accommodate online sales while online-only businesses pop up in their thousands. In 2021, over 65 new e-commerce businesses were created across the UK daily.

Indirect tax landscape for e-commerce

For most e-commerce players, the ability to scale is a strategic priority, and many will be turning their attention abroad to increase sales and reach new markets. However, evolving global VAT and indirect tax rules are a risk to that growth and present a challenge that’s easy to overlook until a problem arises. Online businesses of all sizes selling globally are acutely affected by indirect tax and cannot afford to be complacent.

Tax authorities across the globe are implementing new digital and cross-border sales rules to recoup lost revenue from brick-and-mortar spending and ensure a level playing field. Additionally, tax authorities are trying to keep pace with

digitalisation, with some European countries drastically reforming tax reporting processes.

Italy, for example, mandated real-time reporting of e-invoices, meaning transactional data and information must be made available to the tax authority immediately. Although the UK is currently behind the curve compared to EU countries, it is not unlikely that HMRC will follow the blueprint set by its European neighbours.

Compliance barriers

Businesses looking to sell globally online need to put tax compliance at the top of their agendas, otherwise, they run the risk of failed audits, penalties and fines, reputational damage as well as loss of revenue. However, the facts suggest that many are unaware that tax compliance abroad should be a priority.

Research by Vertex showed that e-commerce businesses are finding it increasingly difficult to comply with VAT rules as well as produce accurate and timely (localised) VAT reports. Often, inefficient systems and processes underpin these tax headaches.

Tax authorities across the globe are implementing new digital and cross-border sales rules to recoup lost revenue from brick-and-mortar spending and ensure a level playing field.

Preparing for the future

Being tax-compliant now doesn’t guarantee compliance in the future. Indirect tax management must be part of strategic conversations for businesses selling online.

Businesses traditionally selling domestically may quickly find they are not equipped to handle international VAT rules. And as both the EU and UK tax rules evolve, businesses selling into other countries need to be ready to adapt.

This requires indirect tax management software with the flexibility to handle transactions in real-time, provide automatic updates for any rule changes, achieve accurate calculation and determination and have the capability to handle digital reporting requirements. Data integrity must also be supported as an essential foundation of compliance.

By taking a deeper look at indirect tax management and adopting a future-focused model, e-commerce businesses can be confident that their strategy is primed for growth.

How we are making international tax rules fairer and more stable

The implementation of the two-pillar solution will stabilise the international tax rules, enhance tax certainty and improve the fairness of the international tax system.

As part of a landmark agreement reached in October 2021, 138 countries and jurisdictions have agreed to a two-pillar solution to reform the international tax rules to address the tax challenges arising from the digitalisation and globalisation of the economy.

The first-ever global minimum tax

Pillar Two of this agreement will help countries protect their corporate tax bases, through the introduction of a global minimum corporate tax for multinational enterprises (MNEs), at an effective tax rate of 15%.

The global minimum tax (the Global Anti-Base Erosion [GloBE] rules) will put a floor on tax competition and will ensure that MNEs pay a fair share of tax wherever they operate and generate profits. The minimum tax does not seek to eliminate tax competition but puts multilaterally agreed limitations on it.

The OECD estimates that the global minimum tax will result in annual global revenue gains of around USD 220 billion — or 9% of global corporate income tax revenues. Pillar Two also safeguards the right of developing countries to withhold tax on certain base-eroding payments — like interest and royalties — if they are not subjected to a minimum rate of tax, through the ‘Subject to tax rule’ (STTR).

The minimum tax does not seek to eliminate tax competition but puts multilaterally agreed limitations on it.

Progress on implementation

Since the agreement was reached, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has released the GloBE model rules commentary, as well as technical guidance to assist countries in implementing the minimum tax — and work on the STTR is well-advanced.

With many countries taking steps towards implementation — including 27 EU member states, Australia, Canada, Colombia, Hong Kong (China), Japan, Korea, South Africa, Singapore, Switzerland, United Kingdom and many other jurisdictions — the global minimum tax is already a reality.

We estimate that almost 90% of global multinational entities with revenue above the EUR 750 million threshold will be subject to the minimum tax by 2025. Regional initiatives are also underway to implement the global minimum tax, notably with the release by the African Tax Administration Forum of a Suggested Approach to Drafting Domestic Minimum Top-Up Tax Legislation.

WRITTEN BY Grace Perez-Navarro Director of the Centre for Tax Policy and Administration, OECD

The Pillar Two model is almost here: why you can’t delay any further

The introduction of the OECD’s Pillar Two rules will lead to more significant data collection requirements, and tax teams need to understand if their current systems can accommodate this.

The OECD’s Pillar Two Model Rules bring about a massive change in the international tax world. The Global Anti-Base Erosion Model Rules (Pillar Two) or ‘GloBE rules,’ are designed to ensure that large multinational enterprises (MNEs) pay a minimum level of tax on income arising in each jurisdiction where they operate.

WRITTEN BY Lucia Higgs Tax Technology Specialist, Wolters Kluwer

The aim is to provide a floor on tax competition. The mechanism is a system of ‘top-up taxes’ to bring an MNE group’s Effective Tax Rate on income in each jurisdiction up to the minimum rate of 15%. This is the latest and most radical move in the project to tackle tax base erosion and profit shifting (BEPS).

What do the Pillar Two rules mean for MNEs?

For MNEs, this means another layer of complexity to calculating their tax liability, requiring additional data sources and involving the application of tax accounting principles. The rules will be layered over existing tax compliance and reporting obligations.

Some MNEs are getting ahead and have working groups planning for the data collection and calculations. Others are taking a ‘wait and see approach,’ given the rules are in draft — or still subject to change. However, several countries, such as the UK, Australia and Singapore, are now expecting to enact domestic legislation soon — based on the GloBE rules — to apply from 2024 or 2025. If the legislation applies for 2024, then corporates need to consider the impact of GloBE tax in their budgets and forecasts later this year.

Identifying current data sources to ensure compliance

Complying with new, complex rules spanning multiple jurisdictions, calculations and associated filing requirements will place an enormous burden on already stretched tax teams. The challenge will be to identify current data sources and ensure accurate compliance calculations.

The comment that the rules are subject to change will still be relevant. There will be the transitional Safe Harbour rules to consider, plus many other issues to be managed. However, ‘subject to change’ is not an excuse for not doing anything. MNEs need a strategy for collecting data (some top-down, some

bottom-up), calculating the tax and managing the inevitable added complexities as the group corporate structure changes or more countries enact legislation.

Tax teams will need to embed Pillar Two calculations quickly because other tax obligations will need attention soon: DAC 7 (the EU Directive on tax transparency rules for digital platforms) and in the UK — Making Tax Digital, to name a few. Tax is part of a corporate’s environmental, social and governance (ESG) strategy, and we expect more tax obligations to come.

How to address tax obligations

While some MNEs use tax software to manage their tax calculations, many are collecting the data they need in a disparate and disjointed manner — with many only using spreadsheets.

Corporates tell us what they want in an ideal tax solution: one that connects with accounting and other data; a source of data which can be repurposed for all tax filing obligations, from group and local tax provisions and tax returns to Country-by-Country Reporting; and now also for Pillar Two calculations. In short, a tax platform that can deal with Pillar Two as it is now and is flexible enough to adapt to future tax legislation changes.

Wolters Kluwer CCH Integrator has met the needs of tax professionals for over 15 years, within the profession and in-house. With CCH Integrator, all Pillar Two requirements can be met by leveraging its existing controlled processes and calculations. Our tax specialists are speaking with businesses to discuss the implications of the new rules and how our global tax provisioning software can address these.

Subject to change is not an excuse for not doing anything.

Placing growth at the heart of our tax system

BY

system reform

Director

Despite increasing business concerns regarding taxation, we believe in the potential of our tax system as a force for growth for SMEs.

While energy and inflation remain top business concerns, the British Chambers of Commerce (BCC) is seeing the issue of taxation emerge as a growing anxiety for many firms.

Tax system concerns

According to our latest Quarterly Economic Survey, almost two-fifths of businesses (38%) are citing taxation as a concern. When we look at our Business Outlook Survey (carried out in January and February), we see a similar trend, with regulation and taxation problems regularly troubling a third of firms (30%).

However, we believe that the taxation system can be reimagined as a force that enables growth. While there are many ways it can be redesigned to support SMEs, there are two key areas where the Government should focus: the labour market and business rates.

Unlocking our labour market

With over 1.1 million unfilled jobs, our tight labour market is one of the most significant barriers to business growth. The availability of affordable childcare remains a key contributor to the size of our inactive workforce, with 1.7 million people unemployed due to caring responsibilities. To

unlock this pool of talent, childcare must be made more affordable.

We are asking the Government to immediately increase the support available to parents through Tax-Free Childcare accounts. Longer-term, it should also consider more radical options, such as reforming the tax system to allow parents to claim tax relief for childcare against a proportion of their joint income. For self-employed parents, a portion of childcare could also be claimed as a business expense.

Business rates for growth

Business rates currently take no account of a firm’s turnover or profits.

We believe they should be made more flexible to encourage growth. In the longer term, the Treasury should consider a rates system that reflects the lifecycle stage of business (eg. ‘startup rate’ for new firms). The Government should also implement an annual revaluation scheme — to better reflect the true value of a business.

Despite the issue of taxation emerging as a growing concern for many businesses, we believe that with the right vision, the tax system can become a force that enables growth for our local businesses and the national economy.

Making Tax Digital was introduced to help small businesses and make the tax system simpler for them to navigate. However, before it can fulfil its potential, its shortcomings must be addressed.

As part of the reform of the UK’s tax administration system, the introduction of Making Tax Digital (MTD) has the potential to ease the administrative burden of small firms and simplify the taxpaying process. But four years after its launch, small businesses are finding MTD has done little to smooth the tax administrative process but has significantly increased their costs of compliance.

Areas of improvement in the tax system

Small businesses who have adopted MTD do not view it favourably in terms of reducing the complexity in the tax system, easing cashflow management and reducing hours spent on tax compliance — all areas MTD was supposed to improve.

Our ‘A Duty to Reform’ report shows 7 in 10 (71%) small firms agree that MTD brings with it additional costs through new software, subscriptions, and time spent learning the new processes.

The cost of compliance is significantly higher for small businesses that have switched to Making Tax Digital, at £4,562 per annum compared to £2,960 for those yet to switch, according to the research. Only a quarter of small businesses agrees that MTD has reduced complexity in the tax system.

WRITTEN BY Martin Mctague National Chair, Federation Of Small Businesses

Complexities slowing down small businesses

MTD software has the potential to raise awareness around tax reliefs (typically small businesses are not fully aware of what’s available). We would like to see the reliefs small businesses may be eligible for built into the software prompts coming from the data inputted — this must not be a cost add-on to software, however.

The UK’s tax system has been built up through decades of incremental changes, creating the very complex system businesses face today. This complexity has led to many small businesses feeling somewhat disenfranchised by the tax system. Larger organisations that have dedicated tax teams are in a much better position than small business owners who have to spend significant resources to pay their liabilities and comply each year.

In order to be trusted, any new system must not only be fair in design; it must also be fair in operation. MTD is a major reform that will require continual adjustments.

With over 1.1 million unfilled jobs, our tight labour market is one of the most significant barriers to business growth.

The cost of compliance is significantly higher for small businesses.

A tax

will help small businesses advance and grow more rapidly

WRITTEN

Alex Veitch

of Policy & Public Affairs at the British Chambers of Commerce

If

~Joanna Rowland, Director General for Transformation, HMRC

a business uses compatible software to keep track of finances, they can easily file a tax return as needed, as all the information is already available to submit.

We believe that the taxation system can be reimagined as a force that enables growth.

~Alex Veitch, Director of Policy & Public Affairs at the British Chambers of Commerce