Effect of taxes on small businesses

The effect of taxes on small businesses is a wide topic. This page presents material on three specific matters which Mr Thomas focused on when opening the debate: the Goverment’s Making Tax Digital programme, the level of the VAT registration threshold, and the structure of Business Rates – in relation to concerns over the competition posed by online shopping.

Making Tax Digital

In December 2015 HM Revenue & Customs published Making Tax Digital – its strategy to implement a new system of digital tax accounts to be used by businesses, the self-employed and landlords. The Government proposed that the new system would be rolled out over two years, first applying to income tax returns (in 2018), and then extended to VAT (in 2019) and corporation tax (in 2020).^[1]  Initially the Government anticipated that in the first phase from April 2018 businesses, self-employed people and landlords would be required to use digital accounts, updating HMRC on a quarterly basis; employees and pensioners would be exempt, unless they had secondary incomes of more than £10,000 per year from self-employment or property.

Following a consultation exercise last year, in the 2017 Budget the Government set out plans to roll-out digital tax returns from April 2018. To begin with unincorporated businesses and landlords would have to file income tax returns this way, if their annual turnover exceeded the VAT registration threshold – the point at which traders are requirement to account for VAT – although those with a turnover below this threshold would have another year to prepare. Businesses, self-employed people and landlords with turnovers under £10,000 would be exempt from these requirements.^[2]

The Government anticipate that this new system for tax returns will substantially reduce the scale of taxpayer errors in record keeping, raising significant extra revenue for the Exchequer,[3] although some commentators have argued that the compliance burden on smaller businesses will be considerable.

Many stakeholders have also raised concerns about the potential impact of digital tax returns for taxpayers who may be digitally excluded, or have limited experience of using computers for their financial record keeping. HMRC’s tax information & impact note on this reform, published alongside the Budget, notes the following:

• The government recognises that many people with disabilities use digital technology and are able to interact online using assistive technology. HMRC will ensure that available software will be compatible with forms of assistive technology and that those that are willing to operate Making Tax Digital for Business (MTDfB) are able to do so.
• Ofcom’s 2016 statistics indicate that 59% of homes now own a tablet device and 71% of UK adults now have a smartphone. 97% of small and medium-sized businesses have access to online services. Although it is expected that the digitally excluded population will be relatively small, some of the segments impacted by the changes may be disproportionately represented within this population.
• Individuals with protected characteristics under the Equality Act who fall within the current legislative definitions of ‘digitally excluded’ will be exempted from the digital record-keeping and update requirements and HMRC will provide non-digital alternative channels to them … The government recognises by their very make-up that [the group of small and micro businesses] includes businesses which are likely to be more affected by one-off transitional costs and digital capability issues, and may therefore find it more difficult to move to the new digital requirements.
• In the consultation the government said that it wanted to consult further on financial support to help some businesses make the transition to the new arrangements. It sought views on the support required and what form this should take … The number of businesses and individuals affected and the impacts on them will be reviewed throughout 2017 as large scale piloting takes place in advance of MTDfB’s mandatory introduction.^[4]

The Finance Bill 2017, which was published on 14 March, initially included the first tranche of legislation to establish Making Tax Digital – specifically clauses 120-122.[5]  Following the Prime Minister’s announcement, on 18 April, of the Government’s intention to call a General Election on 8 June, the House completed all of the remaining stages of the Bill in the Commons on Tuesday 25 April.

With cross-party support the Government removed a series of clauses from the Bill, with the intention of legislating for these at the start of the new Parliament, including these clauses. On this occasion Treasury Minister Jane Ellison said the following:

“The Bill is progressing on the basis of consensus and therefore, at the request of the Opposition, we are not proceeding with a number of clauses. However, there has been no policy change. These provisions will make a significant contribution to the public finances, and the Government will legislate for the remaining provisions at the earliest opportunity, at the start of the new Parliament.

The Government remain committed to the digital future of the tax system, a principle widely accepted on both sides of the House. We recognise the need for the House to consider such measures properly, as called for by my right hon. Friend the Member for Chichester (Mr Tyrie) and his Treasury Committee. That is why we have decided to pursue those measures in a Finance Bill in the next Parliament, in the light of the pressures on time that currently apply.”[6]

However, on 13 July the Financial Secretary to the Treasury, Mel Stride announced that the timetable for implementing MTD would be substantially amended:

Under the new timetable:

• only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes
• they will only need to do so from 2019
• businesses will not be asked to keep digital records, or to update HMRC quarterly, for other taxes until at least 2020.

Making Tax Digital will be available on a voluntary basis for the smallest businesses, and for other taxes. This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new digital system. As VAT already requires quarterly returns, no business will need to provide information to HMRC more regularly during this initial phase than they do now. All businesses and landlords will have at least two years to adapt to the changes before being asked to keep digital records for other taxes.[7]

At this time the Government confirmed that provisions for the MTD programme would be included in a Finance Bill to be introduced “as soon as possible after the summer recess.”[8] In turn this second Finance Bill was published on 6 September, including these provisions.[9]

While the revised timetable was welcomed by stakeholder groups, such as the Chartered Institute of Taxation, and the Low Incomes Tax Reform Group, Members have continued to raise concerns as to the potential impact on taxpayers, especially smaller businesses.[10] Finally, it is likely that the decision to phase in MTD over a longer period will have implications for the revenue impact of this reform. The Government has stated that HMRC will publish an updated impact assessment later this year, at the Autumn Budget.[11]

For more details see, Making Tax Digital, Commons Briefing paper CBP7949, 12 October 2017.

Notes : 

[1]     HMRC, Making Tax Digital – the roadmap, December 2015 (see, Timeline, at pp11-12)    

[2]     Budget 2017, HC 1025, March 2017 para 3.39.  The report also confirmed that the VAT registration threshold would be increased from £83,000 to £85,000 from 1 April 2017 (para 3.36).

[3]     The Budget report estimated the Exchequer gain at around £1.9 billion over the period 2018/19 to 2021/22 (op.cit. Table 2.1- item 17; Table 2.2 – item bb).

[4]     HMRC, Making Tax Digital for business – tax information & impact note, March 2017

[5]     Details were given in the Explanatory Notes to the Bill (Bill 156-EN 2016/17).

[6]     HC Deb 25 April 2017 c1013

[7]     HM Treasury press notice, Next steps on the Finance Bill and Making Tax Digital, 13 July 2017

[8]     Finance Bill: Written Statement, HCWS47, 13 July 2017

[9]     specifically clauses 60-62 of the Finance Bill 2017-19. For details see, Finance Bill 2017 – Explanatory Notes (Bill 102 – EN), September 2017 pp278-295

[10]    See, for example, PQ4473, 20 July 2017; PQ10125, 9 October 2017

[11]    PQ6497, 6 September 2017

VAT Registration Threshold

VAT is charged on the supply of all goods and services made in the course of a business by a taxable person, unless they are specifically exempt.  All businesses must register for VAT if their turnover of taxable goods and/or services is above a given threshold, which is currently £85,000.^[1]  Registered businesses may apply to be deregistered for VAT if their turnover falls below a second, lower threshold, which is currently £83,000.

Generally VAT is charged either at the standard rate – currently 20% – or the zero rate.^[2]  VAT is charged on the additional value of each transaction, and is collected at each stage of production and distribution.  A business pays VAT on its purchases – known as input tax, and charges VAT on its sales – known as output tax.  It will settle up with HM Revenue & Customs for the difference between the two.  In the end the cost of the tax is borne by the final consumer.

Reforming the registration threshold has been considered on two occasions in the last few years: by the Labour Government in the early 1990s, and by the Coalition Government in the context of its decision to increase the standard rate of VAT to 20% in January 2011. However, neither of these reviews resulted in any major changes.

For its part the current Government has taken the view that, “the UK’s current registration threshold achieves a reasonable balance between competing interests and reduces the administrative burden on the smallest businesses.”[3] In the 2017 Budget, as in previous years, the registration threshold was increased in line with inflation.[4]

In the Autumn Statement in November 2016 the Government announced that it had asked the Office for Tax Simplification (OTS) to carry out a review on aspects of the VAT system.[5] One of the issues the OTS has been asked to consider is, “the issues and impacts which would be involved if the VAT registration threshold were either higher or lower than at present.”[6]

The OTS published an interim report in February 2017, asking for views on a number of questions; in the case of the registration threshold, the authors noted that “the £83,000 threshold seems to be having a distortionary impact on business population with an unusual number of businesses reporting turnover at levels just below the threshold”, and posed the question as to whether “there be simplification benefits in having, for example, a tiered regime, or offering tax reliefs to reduce the cliff edge impact as many EU states have done?”[7] Their final report had not been published at the time of this debate, but is now available.

For more details see, VAT registration, Commons Briefing paper CBP963, 13 November 2017.

Notes :

[1]     With effect from 1 April 2017 (HMRC, VAT registration thresholds, April 2017)

[2]     A reduced rate of 5% is charged on a small number of supplies; for more details see, HMRC, VAT rates on different goods & services, May 2017.

[3]     PQ10779, 19 October 2015; see also, PQ54208, 30 November 2017

[4]     The threshold was increased by £2,000 in line with inflation by Order (SI 2017/290). See also, HMRC, VAT: registration thresholds: tax information & impact note, 8 March 2017.

[5]     Autumn Statement, Cm 9362, November 2016 para 4.43

[6]     OTS press notice, OTS publishes VAT review terms of reference, 8 December 2016

[7]     OTS, Review of Value Added Tax: Progress report and call for evidence, February 2017 pp4-5

Business Rates and online shopping

In the March 2017 Budget speech, the Chancellor, Philip Hammond, said:

“Business rates raise £25 billion per year, all of which, by 2020, will be going to fund local government, so we cannot abolish them, as some have suggested; but it is certainly true in the medium term that we have to find a better way of taxing the digital part of the economy—the part that does not use bricks and mortar. In the meantime, there is scope to reform the revaluation process, making it smoother and more frequent to avoid the dramatic increases that the present system can deliver.”[1]

The Government has not yet published any documents relating to reforms to taxing ‘the digital part of the economy’. Information on the subject matter of recent reviews of the business rates system is available in section 3 of Reviewing and reforming business rates, Commons Briefing paper CBP7538, 28 April 2017.

The Government published a discussion paper in March 2016 entitled Business rates: Delivering more frequent revaluations. The Budget indicated the Government’s preference to move from five-yearly to three-yearly valuations.[2]

The discussion paper also gives some space to the possibility of introducing self-assessment for business rates. Occupiers of properties would assess their own rateable value, with systems in place to assist with complex valuations.

The Government committed to working with local authorities to standardise business rate bills across England and to ensure that ratepayers can pay bills online by April 2017.

The Government will “consider the feasibility of replacing Small Business Rate Relief with a business rates allowance for small businesses”.[3]

Details of business rate reliefs currently available for small businesses can be found in sections 2.1 and 2.2 of Business rates, Commons Briefing paper CBP6247, 28 April 2017.

Notes : 

[1]     HCDeb 8 Mar 2017 c812

[2]     HM Treasury, Administration of business rates review in England: summary of responses, 2014, p. 7

[3]     Ibid.