Tax stigma to running a small company warned against

Running a small company risks being stigmatised unless the taxman can ‘go granular’ in his charge that such non-large businesses are big ‘tax gap’ contributors, a chartered body says.

Facing the Public Accounts Committee, HMRC said the largest part of the ‘tax gap’ was down to SMEs, responsible for 46% of the gap -- equating to £15.5billion in 2015/16.

But the nature of the gap “merits a more detailed explanation from HMRC than [it] shares at present,” said the Chartered Institute of Taxation, speaking after the PAC session.

“Without more granularity on the nature of the impact on the tax gap, HMRC risk stigmatising SMEs”, said the institute’s tax policy director John Cullinane.

“[This] could be unfair and does not seem calculated to improving whatever underlying behaviour is the cause of the problem.”

'Not the Sheriff'

But rather than new details, what’s needed from HMRC is a change of focus, suggests a former tax inspector who now advises contractors and other small companies on compliance.

“As much as HMRC is tasked with ensuring the tax gap shortens year on year, HMRC is not the Sheriff of Nottingham incarnate”, says Carolyn Walsh, boss of Andraste Accounting.

“[Indeed, the Revenue’s] main responsibility is ensuring taxpayers pay the right amount of tax. [And] when HMRC talks about a lack of compliance, that’s not just about tax not being paid”.

'Raise IR35 awareness'

Walsh says IR35 is a case in point. It is ineffective because largely, “contractors have ignored its existence.” She outlined how, like Cullinane, she’s interested in the ‘underlying’ issue.

“A change in practice to require PSCs [in the private sector] to prove IR35 has been considered, [just as they must give] proof of their qualifications or ability to carry out the requirements of the contract, would go a long way towards easing that situation.”

She added: “In my experience, when contractors recognise that IR35 applies, then tax and NI is paid correctly.

“This is because few people do deliberately avoid paying their taxes and so HMRC does not need to deploy a carrot or a stick, it just needs to raise awareness of the obligation to observe IR35 legislation.”

'As low as possible'

Facing the PAC, the Revenue said it has a number of other measures in the pipeline designed to further reduce the 'tax gap' (it has narrowed by 6.9%) – which is defined as the difference between what gets collected and what, in theory, should be collected.

“We asked HMRC how much further the tax gap can realistically fall,” the committee said. “HMRC told us that it is difficult to estimate the lowest feasible level but, while it cannot be completely closed, HMRC will aim to get it as low as possible.”

Making Tax Digital, which will apply to companies with turnover over the VAT threshold, is the most relevant measure to SMEs that the Revenue says will help it close the tax gap in future.

'Self-employment intermediaries'

The department added it would work with SMEs’ accountants and “intermediaries in the self-employment sector” to do so, ahead of the roll-out of MTD for businesses from April 2019.

But Cullinane wants more to be done. “If more focussed information on SMEs and the tax gap is simply not available to HMRC, then more needs to be obtained, so targeted initiatives can begin”.

“For example,” he added, “we are still awaiting publication of the final report following the Business Records Checks initiative, which would both indicate the extent to which inadequate record keeping contributes to the tax gap and provide more information on the nature of the errors.”