Why SMEs need more support with the online tax system

The drive towards an online tax system is proving time consuming for many small and medium sized enterprises (SME), according to recent AAT research. Adam Harper, AAT’s Director of Professional Development, argues that more needs to be done to offer support where it’s needed.

The introduction of Real Time Information (RTI) and other legislative changes in the tax system (such as Universal Credit) continue to have a big impact on the business sector, with a real push to getting businesses reporting online.

With the news that the tax authority is considering proposals to close all of its 281 enquiry centres, the approach moving forward would be that the general public and businesses will have to rely predominantly on telephone and web support. There is greater expectation and emphasis upon businesses to embrace technology and adapt immediately to meet these legislative changes.

In October last year, nearly one in five (17.5 per cent) claimants filed a paper-based self-assessment tax return. This indicates that there are a significant number of people who, even with the later electronic filing deadline date incentive, still aren’t embracing technology when it comes to dealing with HMRC – either because they choose not to, or because they lack understanding and prefer to stick to an approach with which they feel more comfortable and find less onerous.

A lack of online access and computer skills

Looking at the UK population as a whole, the Office of National Statistics estimates that there are 7.1 million adults (14 per cent) who have never used the internet and 5.2 million households without internet access. Of the 5.2 million households without internet access, the majority said that they didn’t have a connection because they ‘did not need it’ (54 per cent), while one in five households (22 per cent) indicated this was due to a lack of computer skills.

At AAT we wanted to find out what impact changes to the tax system were having or going to have on those most ‘at risk’ of being left behind – particularly small businesses and the self-employed. SMEs account for 99.9 per cent of all private sector businesses in the UK, employ 14.1 million people and turnover £1.5bn. For these businesses, many of which do not have HR or finance functions, the complexity of the tax system can be overwhelming and many struggle to understand, keep abreast of and implement changes.

Feeling the effects of a more digital-based tax system

Our survey of 1,000 self-employed and micro businesses with less than 10 employees, showed that the majority are feeling the effects of a more digital-based tax system, with 39 per cent saying they feel excluded and lack the resource and understanding to keep up.

Key findings included:

• More than two thirds (68 per cent) think the tax system is becoming more digitally focused
• Just under one third (29 per cent) have begun using third party accountancy support to cope
• One in five (20 per cent) regard the process of completing a tax return as too complicated and should be simplified
• 21 per cent believe that larger businesses are advantaged as they have more resource to spend on specialised support

Research we conducted earlier in the year clearly indicated that the introduction of RTI has been costly, not only financially but administratively to small business owners. This new set of research indicates that the move to bring everything ‘online in real time’ is yet another challenge for them to overcome.

One in 10 filed their latest self-assessment tax return using the paper filing method despite the incentive of a later deadline for electronic returns. Of those, nearly three quarters (72 per cent) were capable of doing it online but preferred the traditional approach.

Respondents identified the HMRC website as the most common way to seek help with their business’ tax affairs (49 per cent), but nearly 61 per cent have never used or considered using technical solutions (such as basic accounting IT packages and free downloadable resources) to conduct their tax affairs online.

Not all small business owners are digitally engaged

It’s clear that conducting one’s tax affairs online is a time consuming and daunting process that requires specialist support that SMEs may lack.

While reporting digitally and in real time will be hugely beneficial in the long-term, we do have to cater to the fact that not all small business owners are digitally as engaged as others and this is especially so depending on the type of industry they work in and the nature of their business.

Furthermore many are capable of filing online but choose not to, and the majority don’t use technical solutions that have been designed to make their lives easier. I do question whether there needs to be a bigger communication push from government to let SMEs know that these resources are readily available and at their disposal as clearly they are unaware of these tools or don’t feel they can use them appropriately .

Research conducted in June 2013 showed that administration is one of the most time-consuming activities for small business owners in the UK. According to the American Express Small Business Barometer, more than half of SME leaders listed admin as one of the three activities they spend most time doing.

Reporting tax digitally is often outsourced by SMEs

As a result, a considerable number of micro businesses outsource for help and support particularly when it comes to ‘reporting digitally’ as our research suggests. This reinforces the need for regulated accounting professionals to be continually up-to-date with forthcoming processes and regulations on behalf of their clients.

In addition, better education of existing resources– particularly technical solutions and packages provided by HMRC needs to take place. Uptake of these resources is low. We must offer more simplified streamlined support to the SME community and across industry sectors to suit various business models, especially those that don’t necessarily operate through digital systems. We must work hard to reduce the burden on SMEs so they can focus on what’s important – business growth.

If we want an ‘entrepreneurial UK’ in which start-ups thrive then we need to ensure that ‘tax isn’t taxing’ by simplifying the process and offering more support to those that need it. No business should feel digitally excluded and more needs to be done to engage those most at risk of being left behind.

More information on the full research report can be found on the AAT website.

Adam Harper is AAT's Director of Professional Standards & Policy..