Select Committee on Treasury Minutes of Evidence

Memorandum submitted by the Federation of Small Businesses


  1.1  The Federation of Small Businesses, with some 168,000 members, is the largest organisation of small businesses and self-employed persons in the country. The self-employed form a substantial part of those taxpayers who are dealt with under Self-assessment.

  1.2  The introduction of Self-assessment in 1996-97 caused slight upheaval for most of the self-employed since the majority have their tax returns prepared by agents and all of them, both before and after Self-assessment will have been required to file tax returns. The Self-assessment system is an improvement, doing away with the complicated structure of estimated assessments and appeals, which could take a very long time to produce a conclusion. The FSB in its submissions in 1994 felt that the then existing system could have been "tightened up" by implementing the already considerable armoury of penalties for non-compliance.

  1.3  For the substantial minority who do not use agents, the system remains terrifyingly complex, particularly if they file after 30 September and have to calculate their own tax.

  1.4  A number of problems have emerged over the subsequent years.


  2.1  The FSB told the Inland Revenue that the move to Self-assessment with a very strict filing deadline would lead to bunching. Human nature being what it is, it will always be the case that a very high proportion of tax returns will be submitted in the last two months before the 31 January deadline. The Inland Revenue says that this problem worsens each year, with an increasing rush in the final two weeks of January.

  2.2  As a result of this bunching it takes the Inland Revenue a long time to process returns from January to March. Taxpayers experience significant delays in processing returns through the year. Tax returns filed after 30 September are often not processed in time for the issue of a Statement of Account showing the tax due before 31 January.

  2.3  December and January are also the worst months of the year for a work peak, because Christmas falls in the middle of the period. This affects efficiency on all sides of tax administration.

  2.4  It is time to reconsider the dates of the tax year. If this were the case, all parties (Inland Revenue, taxpayers and agents), would benefit from anything which spread the flow of returns more evenly through the year.

  2.5  One way of achieving that would be to make the return year for Schedule D Case I and II taxpayers coterminous with their accounts year (as is done for Corporation Tax). There have been objections to this on the grounds that the return year for other income arising continues to be the year to 5 April, but the perceived problem was solved for partnership income, so it would seem possible to do the same thing for sole traders. For small taxpayers other sources of taxable income are insignificant.


  3.1  Self-assessment accelerated the timescale for the payment of tax by the introduction of statutory payments on account, and backed this with substantial penalties.

  3.2  A major problem for business taxpayers is that at the second 31 January after commencement of business they have to find the first year's tax in full plus the first instalment of the second year, so paying 150 per cent of a year's tax all at once (the one and a half times whammy). This will also cause difficulties when the system of allowances changes, as when the Married Couple's Allowance was abolished, because taxpayers find themselves due to pay unexpectedly large sums.

  3.3  This problem could be tempered by a facility to pay income tax by direct debit in monthly instalments. The Inland Revenue tried this in the North East of England and we understand that this was successful. Income tax could be collected in 10 equal monthly instalments, in the way that Council Tax often is. The feature of "little and often" is an accepted fact of everyday commercial life.

  3.4  It would also be useful to have alternative methods of payment, such as by credit card. This method is not currently available even when paying over the internet. Given the Inland Revenue's enthusiasm for e-commerce one would have expected them to look to the greater use of plastic.


  4.1  It is a stated intention of the Inland Revenue to try to get people back from the shadow economy into regular tax paying. However, the structure of surcharges, interest and penalties makes this very difficult. These are far harsher than they were before Self-assessment and although the Revenue has powers of mitigation these added charges can make the difference between it being difficult for somebody to pay their back taxes and being completely impossible. In particular the addition of surcharges (which also bear interest) has made it much more difficult for those who get behind with their payments to catch up.

  4.2  The Inland Revenue has stated that it will make more use of the power to collect daily penalties where tax returns are outstanding: this should be well targeted to concentrate efforts on those who do not make returns rather than just those who owe money.


  5.1  The burden of Inland Revenue enquiries under Self-assessment falls disproportionately on small businesses who are most likely to be the subject of an enquiry. These enquiries last longer and produce the least additional tax, of any enquiries under Self-assessment.

  5.2  The Inland Revenue annual report for 2000-01 said, "We just missed the target of 90 per cent of settled SA business enquiries to have been worked to a satisfactory or better standard". The FSB draws attention to the fact that more than 10 per cent of enquiries were worked to a standard that was less than satisfactory. All enquiries have a psychological cost to the taxpayer, which can threaten their livelihood and even their personal relationships.

  5.3  Most enquiries are still worked from a confrontational attitude by Revenue inspectors. A revised framework for enquiry work is about to be issued to Inland Revenue staff and it is hoped that this, together with Working Together initiatives, will reduce the confrontational attitude which is too often apparent in enquiry work.


  6.1  These are accepted for businesses with a turnover of less than £15,000. This is a throwback to the days before Self-assessment and modern technology should be able to cope. We question whether this is appropriate as all taxpayers are required to keep detailed records.

  6.2  The three line account should be abolished and all self-employed taxpayers should be required to fill in the standard accounts information.


  7.1  Sometimes, during processing, the Inland Revenue mislays information that has been provided with the tax return. This can lead to such returns being selected for enquiry unnecessarily. This is particularly true of information on paper accompanying the return, but information provided in the "white space" on the return may also be lost. It is important that a method of capturing that information be introduced. This should not happen with electronically filed returns, but they are so far only a tiny proportion of the total.


  8.1  It is a common complaint among small business taxpayers that they used to know the person in their local tax office who dealt with their tax affairs. With the changes to a "call centre" approach this personal contact has been lost, and relationships need to be rebuilt. The history of citizens' experience with call centres has not been a universal success. The impersonal approach causes frustration and should be last resort rather than the front line.

Federation of Small Businesses

21 February 2002

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