Making Tax Digital initiative crippling growth potential, FSB report

Making Tax Digital

The Making Tax Digital initiative has “significantly increased costs and admin burdens for small firms“, according to a new report from the Federation of Small Businesses.

FSB’s new publication, A Duty to Reform: Making tax work for small businesses in a digital world, shows that small firms are each spending an average of £4,100 and 52 hours a year on tax compliance.

For those that are participating in the Government’s Making Tax Digital programme – designed to fully digitalise the tax reporting process – the average cost of compliance (£4,562) is considerably higher than for those yet to migrate (£2,960).

Those in scope of MTD must purchase compatible software, subscriptions for which have significantly added to compliance costs. There are concerns that these costs will grow further as the initiative is extended to cover more taxes.

Seven in ten (70%) small businesses have made the MTD switch. Among them, a similar proportion (71%) say that the move has resulted in increased costs and time lost to learning new processes.

NOW READ: Applications now open for Clean City Awards 2021

Collectively, the small business community is losing £25billion a year to tax compliance – a figure which does not reflect the 300 million working hours spent on preparing and filing records.

The report also finds that the requirement to register for VAT once a firm has £85,000 of turnover serves as a barrier to growth for one in four (24 percent) firms, equivalent to 1.4 million businesses across the UK.

Elsewhere, the study flags a lack of awareness among small firms of the tax incentives they’re entitled to – fewer than one in 20 (four percent) see the Government’s new Super Deduction for plant and machinery investment as a top incentive to invest and expand.

More than a third (34 percent) say a reduction in National Insurance contributions would assist growth.

FSB National Chairman Mike Cherry said: “Small businesses are fully behind the Government’s vision for a high skill, high productivity, low tax economy. With costs soaring, and the Budget approaching, it’s now time to see the policies that will get us there.

“Reducing the huge amount of time and money lost to tax bureaucracy would free up billions for investment, upskilling and digitalisation. We’ve always said that – rolled-out in the right way – MTD could mean productivity gains over the long-term.

“However, for many of those who’ve already taken the plunge, the programme has so far yielded higher costs and greater complexity.

“The Government has rightly pushed back the start date for income tax to be a part of the scheme. It should now use that time to engage with the small business community regarding impacts to date and chart a course forward to ensure the programme is delivering as expected.

“As things stand, more than a million firms say they’ve stopped growing their turnover because of the VAT threshold. If we want the economy firing on all cylinders again, reform of this levy – seen as the most burdensome of all by firms – is a must. We must stop the £85,000 turnover threshold serving as a ceiling to the growth we desperately need.”

Cherry added that raising the Employment Allowance to cover £5,000 of an employer’s national insurance bill would “go a long way” to helping small firms steel themselves for an uncertain and unpredictable winter.

For the latest headlines from the City of London and beyond, follow City Matters on TwitterInstagram and LinkedIn.