There's an urban myth that many small businesses fail in their second or third year because of a failure to pay their taxes. This is sometimes known as the rock star method, named after musicians who fail to hold back money to pay year one's tax bill that falls due in year two or three.
This urban myth seems to have gained traction at the Office of Tax Simplification (OTS), as the body is currently running two questionnaires: one for landlords and another for small businesses, which are open until 20 September 2019.
In their small business quiz, the OTS asks several times whether it would ‘help’ you to know your tax liability.
- Question 12: On a scale of 1 to 5 how easy do you find it to budget throughout the year to pay your tax bill?
- Question 14: Would more regular reporting of income and expenses make budgeting of your tax bill easier, so that you can see how much tax you owe at any point in time (closer to real-time)?
The OTS is looking at possibilities which might lead to enormous structural changes in the tax system, so their evidence base needs to be as wide and deep as possible if we are to avoid another VATMOSS.
I would encourage you to complete the survey and share it widely on your networks.
PAYE for self-employed
The solution OTS is floating is essentially a form of PAYE for the self-employed, and it addresses these points over a range of questions in the survey:
- Would it help you if your engager deducted some tax before they paid you?
- Would it help if your bank deducted some tax before they paid you?
- Would it help landlords if the letting agent or Airbnb deducted tax before they paid you?
The underlying assumption is that it would make life easier if every earner were to be on something like PAYE.
It might, but what if you are a payer of the self-employed as well as a fee earner? Would it make life easier if you have to act as an employer rather than an engager?
The danger with the OTS questionnaire is that a lot of the questions show us the way their thinking is evolving – towards some kind of withholding tax or PAYE – rather than being a genuinely open attempt to take the temperature of the very smallest businesses.
Aside from the demographic questions (age, status, agented or not, cash basis, user of apps or software, possession of other sources of income), the questions seem to cluster into three groups.
The first two broad forms of questions amount to:
- How do you track your expenses?
- How do you track your tax liability?
The combination of these two areas of concern falls in the same category as the reasoning behind the introduction of MTD: the belief that everyone needs to have a constant running total in their head of their profits and tax liabilities for the year.
Is that actually the case?
I know roughly whether I've made more money or less than I did last year so I am not surprised by my tax bill, but I am genuinely unconcerned by my lack of precise knowledge of my tax liabilities for the year to date.
The third grouping of the OTS questions seems to be:
- How do you want to change?
- Do you want the engager to deduct tax, or would you prefer it to be the bank?
- Do you want the deduction to be a flat rate or with some adjustment for expenses?
These are not open questions. It is disappointing that the OTS has chosen to use this cheap internet survey route rather than commissioning (admittedly expensive) research, using citizens’ juries and the like.
The only open question on the survey is the final one:
- Q24. If you earn enough to pay tax and national insurance, what changes, if any, would make the annual income tax return process simpler for you, and why? Please describe."
My answer would include prepopulated tax returns, a standing order system that works like utility bills, and an MTD that was voluntary rather than mandatory for which HMRC provided free software.
What about you?