A leading accountancy firm has sounded the alarm over a consultation by HMRC into tax rules for small businesses, arguing it will not close the tax gap and leave firms tangled in even more red tape.
Consultation Details
Blick Rothenberg argued that the current HMRC consultation into close companies, which have fewer than five shareholders, fails to deal with more pressing issues and won’t give them the answers they are looking for. The government department launched the 12-week consultation on 19 March, with it set to end on 10 June, looking into proposals to mandate the reporting to HMRC of transactions between close companies and their participators. It also aims to gather information on the scope of transactions and what specific requirements they want to see reported. HMRC claimed the consultation is needed as the small business tax gap accounts for 60 per cent of the overall gap, with it increasing steadily since the 2020/21 tax year to £14.7bn in absolute terms. The “predominant risks” contributing to the gap have been identified as under-reported income and over-claimed expenses, alongside error and evasion in transactions.
Tangled in Tape
But Blick Rothenberg argued that reporting on all transactions increases “complexity” and could ultimately lead to additional costs. Ruth Porteous, senior manager at the firm, said: “HMRC has launched a consultation on proposals to report all transactions between close companies and their participators. The complexity of additional reporting may force close companies that maintain their own records to seek professional advice, creating an additional business cost. HMRC’s objective is to increase the tax paid by these companies…however, these proposals won’t reduce the small company tax gap.” Porteous argued that in cases of transactions, small company directors are likely to cross business and personal accounts, such as items on personal cards being expensed to the company or other products being paid for on the wrong card, which would not be identified.
Lack of Accountants
She also argued that under current legislation, new companies are not required to “engage with an accountant either for advice at the start, or to file statutory financial statements or tax returns”. Porteous said: “There is software that allows you to do this yourself so some companies may not have received any advice from an accountant, at all. They may be making errors through lack of knowledge, but is this really what is causing the tax gap? It is unlikely to be much of it. For new companies trying to save costs and doing their own filings, this can be a false economy if errors are discovered later.”
What Else to Do?
However, with HMRC seeking disclosure on details of cash withdrawals, loans to participators, debts and dividends, the increase, companies who have been filing correctly will be forced to seek advice, leaving them with additional costs alongside rising taxes. She said: “HMRC would be better served by focusing their efforts on identifying these tax evasive transactions before increasing the reporting, and thus administrative costs, for small businesses.” Blick Rothenberg urged HMRC to instead look into income and expenses, which may have been under or over stated, and for companies which are VAT registered, to enquire into income and expenses of VAT returns over the course of the year. The tax firm also emphasised the importance of allowing close companies to maintain control “with no pressure from outside shareholders”, which allows firms to make decisions easier, but urged firms to engage with an accountant when required to avoid filing incorrectly. HMRC was contacted for comment.
