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
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
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
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
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. THREE LINE
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. CUSTOMER SERVICE
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