Home » Tax » A tax system reform will help small businesses advance and grow more rapidly
Future of Tax Q1 2023

A tax system reform will help small businesses advance and grow more rapidly

iStock / Getty Images Plus

Martin McTague

National Chair, Federation Of Small Businesses

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.

The cost of compliance is significantly
higher for 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.

Next article