Posted: Wed 19th Mar 2014
Tax is a thorny issue that's complexity has made it unfathomable for a growing number of busy small firms.
That's why Enterprise Nation has commissioned a detailed white paper offering a tax simplification solution that could banish unnecessary complexity for the smallest firms.
We asked freelance and small business accounting specialist Emily Coltman FCA to examine the tax hurdles Britain's entrepreneurs face - and the result is a sensible solution we want the Government to consider.
The white paper makes two clear recommendations:
To combine PAYE and national insurance
To create a new sales tax instead of taxing profit - which would replace business income tax, Class 2 and Class 4 National insurance, corporation tax and VAT in one move
Enterprise Nation founder Emma Jones said: "The simpler the UK's tax system is made, the better for everyone. These recommendations would eliminate the uncertainty which would save time money for the 4.9 million small and micro business owners in Britain, freeing them up to run their businesses better and do what they do best."
To set the scene: at the moment, small business owners need to have at the very least an awareness of the rules that surround at least four taxes and their different levels of application. But between those four taxes, there are unnecessary complexities.
For example, the issue of payment on accounts means sole traders whose bill for income tax and Class 4 National Insurance amounts to over Â£1,000 a year, and who do not have more than 80% of their tax deducted at source (such as would happen for a sole trader who has a highly-paid job as well as their small business), must make payments on account to HMRC each year.
Emily said: "That may sound simple, but many small business owners find these payments utterly incomprehensible, and cannot see why they are paying tax in advance, or work out how much to pay on what date."
Another problematic issue is how to claim expenses - rules which the collaboration claims are out of step with modern living.
For example a freelancer who works in a local coffee shop to take advantage of their free wi-fi cannot claim the cost of their cups of coffee, because despite the fact that they would not have bought this coffee had they not been in business, HMRC takes the view that everyone must eat to live and will not allow the cost of food and drink save in certain restricted circumstances.
Flat rate falls flat
The white paper also suggests recent attempts at tax simplification have had the opposite effect for small firms. The flat rate tax scheme for example has some unnecessary technicalities that cause more problems than they solve, Emily reckons.
"Businesses using this scheme are entitled to a one per cent discount on their flat rate percentage in the first year of using the scheme. If you work out your flat rate turnover on a cash basis (that is, you add up your sales based on when your customers paid you, not when you issued invoices), and issue an invoice before the discount expires, but receive the cash after the discount expires, you are not entitled to the discount.
"Also, if you are using the scheme, then have to leave it, and are calculating your turnover on a cash basis, then if you issue an invoice while you are using the flat rate scheme, but receive the cash after you leave the scheme, then you pay HMRC the flat rate VAT on that cash - not the full VAT that your customer paid you."
The white paper solution to replace a tax on profit with a tax on sales should be banded depending solely on the amount of sales the business makes each year, rather than the trade it is in. Using figures as an example, a business with sales under Â£5,000 a year would pay 0% sales tax, one who made sales of between Â£5,001 and Â£50,000 a year would pay sales tax at 10%, and so on.
The paper suggests the tax could be collected on a monthly basis, to spread the burden and avoid a hefty annual or bi-annual bill. It could be calculated either using actual sales data (which is not difficult for a business to compute), or by taking an estimate of monthly sales.
Emily added: "Any accountant you speak to will have a horror story of difficulty contacting HMRC, speaking to someone there who understands their problem, and of getting HMRC to correct mistakes whether made by HMRC or the accountant themselves, because HMRC's admin processes take so long.
"If the tax system were straightforward, then HMRC staff would be able to understand it clearly, their tasks would be quicker to resolve, and many of these problems, which take up time and energy on all sides and cause intense frustration, would simply disappear."
What do you think?
Let us know in the comments below. You can read the full white paper here.
About Emily Coltman
Emily Coltman MA (Cantab) FCA, is chief accountant at Edinburgh-based small business and freelance accounting expert FreeAgent.