Budget: Make tax simple and proportionate

With just days before the Chancellor opens his Budget Red Box, one small business group is calling for a major tax rethink to make the tax system simple and proportionate for small firms.

The Forum of Private Business wants key measures on tax to help small firms drive job creation and economic growth - including changing the existing £5,000 National Insurance holiday for the first 10 employees recruited by start-ups to apply to the first two new staff taken on by all firms, handing private lenders tax breaks to boost available finance and drastic improvements in HM Revenue and Customs' systems.

It also calls on the Government to address the perception that small firms are seen as 'easy targets' by HMRC; commit to the merger of NIC and PAYE in the long term; and create a tax system which is simple enough for small businesses to understand.

According to research from the Forum, 54 per cent of business owners felt the current deficit reduction programme is 'about right', 44 per cent called for wholesale changes to the structure of the UK's tax system, 24 per cent want certain tax breaks removed to simplify the system and 15 per cent would welcome a moratorium on tax changes.

A third of the Forum's tax and budget panel members believe that HMRC could improve service levels via more easily understandable communication methods, reducing bureaucracy in the process, nearly one in three want better support at key steps in the business lifecycle and 23 per cent wanted reminders about imminent payment deadlines.

Poor job

In all, just over half of respondents believe HMRC is doing a poor job in supporting them. A similar number feel its tone of communication is poor, and 45 per cent said that it is doing a poor job over targeting tax avoidance schemes, a third criticised its lack of definitive answers to tax questions and a third the lack of clarity in its communications.

Looking to the Budget, business owners prioritised reducing fuel taxes to ease costs, a VAT reduction for labour-intensive industries and removing barriers to employment, such as cutting employers' National Insurance.

They also want less emphasis on measures devoted to short-term revenue-raising – including many of HMRC's activities and business rates increases – encouragement for business investment to stimulate demand and better red tape reform.

The Forum's Chief Executive, Phil Orford, said: "The Budget is a real opportunity to remove the growth barriers for small firms created by the complexity of the tax system. It is clearly one that should not be missed.

"In particular, our members want a level playing field on tax, and the UK's tax system to be conducive to business growth and success rather than a hurdle that is a struggle to overcome.

"It is also time to see genuine tax incentives to boost employment and investment in small businesses – including more encouragement for private lenders to compete with banks and stimulate funding for all firms."

Progressive

In its Budget submission the Forum urged the Chancellor to announce progressive measures on tax to:

Incentivise behaviour that encourages investment in UK businesses

• Reduce the tax on interest received during the lifetime of a loan to zero per cent, instead of the 50 per cent top tax rate, providing the loan is still outstanding after three years;
  
• Implement 20 per cent income tax relief on loans (a loan of £100,000 would cost a lender paying top rate of tax £80,000);
  
• Provide additional tax relief if a business fails before the loan is repaid – the lender could claw back up to 50 per cent income tax relief (at the top rate) on money lost if the firm fails, in addition to tax saved when the loan was issued.
  
• Consider a short term cut in VAT in the housing sector in order to stimulate the construction industry and help boost the industry and create jobs. The Government could cut VAT on home improvements.

Reward business success

• Cut small firms' corporation tax rate at similar levels to the reductions in the main rate in order to reward successful small businesses;
  
• Scrap the 50 per cent income tax rate, balanced by raising the minimum earnings threshold for paying tax to £10,000, following mounting evidence that it is a barrier to entrepreneurship and inward investment, outstripping the Government's income from it.

Allow smaller companies to compete on a level playing field

• Thoroughly review the Business Records Check scheme given the considerable regulatory burden it can place on small businesses;
  
• Place a two per cent cap on business rates in April 2012. Presently, such rates are due to rise by 5.6 per cent, despite inflation currently falling.

Build trust with HMRC

• Implement a review of fines for late payment of PAYE amid concerns that the policy of accumulated fines was not adequately promoted to small businesses either before or during the last tax year;
  
• Work more closely with business groups to improve HMRC's methods and address the perception that small firms are being seen as 'easy targets' for revenue-raising at the expense of longer-term economic sustainability.

Reduce the cost of employment

• Change the existing scheme of offering a £5,000 NI holiday for a new firm's first 10 employees. Instead, the Government should offer the holiday for the first extra two employees taken on by all businesses. Widening the accessibility of the scheme while reducing the extent an individual business benefits could encourage much greater take up.
  
• With Real Time Information and mandatory online VAT filing on the horizon, the Government should undertake a stock check of business capability for handling new online services. A simple, easy-to-use regime should be in place, coupled with proportionate and lenient HMRC monitoring of the schemes in their early years.
  
• In the long term, the Forum recommends that the Government commits to merging National Insurance and PAYE.

Rebalance the tax system

• Build on the commitment to encourage innovation by introducing R&D tax credits as well as a Patent Box. The measures announced in the 2011 Budget to extend the rate of relief for small and medium-sized enterprises (SMEs) were particularly welcome. This move, plus the decision to remove the NIC/PAYE cap and the current minimum spend amount of £10,000, will further encourage SMEs to innovate, particularly start-up firms.
  
• Create a tax system which is simple enough for small businesses to understand. In order to achieve this, the tax system must be reviewed, and, as a medium- to long-term goal, completely overhauled.

Full coverage before, during and after the Budget will be available in the Political News section of UKTECH. The Budget will take place on Wednesday March 21.