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  • New reports set out compliance challenges for SMEs Posted on 04 November 2015

    Having spent ten or so years talking about the needs of small business - in a trade association and previously with the accounting and competition regulators - it is only in the last year or so having set up my own small business that I have realised just how important it is to take care when regulating SMEs.

    In many respects starting up a business today is a breeze. Companies House makes setting up a company simple and straightforward, and every contact I’ve had with them since has been impressive.

    No problems with Santander, its business bank account works well and costs are reasonable. There are also many useful tools online to help with everything from mailshots (thanks, Campaign Monitor) to photos (thanks, 123RF) to invoicing (thanks, Brightbook).

    Then the regulation hits. The biggest culprit? HMRC. As a chartered accountant and having worked with HMRC on various policy issues over the years, I figured I didn’t need to pay an adviser to look after my tax.

    What I didn’t realise is that the whole tax compliance system seems designed to trip up rather than support new businesses. Even the bits that are supposed to help, such as the generous flat rate VAT scheme, cause so many problems you get to the stage of seeing them as more trouble than they are worth.

    Filing VAT and tax returns on line is incredibly complicated. As just a small example, using HMRC’s on-line tax return filing system, you start by completing your accounting information.  To complete this, you have to show the tax due for the year. Tax due is a figure you don’t yet know, because the tax return section of the process comes after the accounts. Eventually you find a way round it, but it’s another 20 minutes of the working day gone.

    This doesn’t need a complete re-design of the HMRC IT systems, or even a lot of changes to the underlying tax system. So much could be achieved just with much clearer and fully tested step-by- step written guidance that covers everything the user might need to do. Until we have that, small businesses really have little choice but to outsource their tax work to an accountant or other adviser, typically for £1,000 a year or much more.

    Today the Public Accounts Committee (PAC) publishes a report on HMRC in which it concludes that HMRC is “still failing to provide an acceptable service to customers and could not tell us when it would be able to do so”. The PAC focuses on help provided by HMRC call centres, who basically don’t attempt to answer most calls. Until the underlying compliance systems are improved, there seems little prospect of HMRC keeping the PAC happy on this front.

    It’s not only HMRC. Today also the National Audit Office (NAO) publishes a report on automatic enrolment to workplace pensions. The Department for Work and Pensions programme appears to be working well so far with larger firms. It’s about to be rolled out now to 1.8 million small employers, in conjunction with HMRC.  Will the DWP system work well for small businesses? Or will this just add to the amounts SMEs are forced to pay out to their advisers? Time will tell, but in typically reserved terms the NAO warns about potential ‘operational challenges’ and ‘bottlenecks’.

    In the finance world, many business finance brokers - small businesses themselves, working hard to support other small businesses -  are increasingly dumbfounded by the details of the FCA consumer credit regulation. My favourite is an FCA email encouraging all newly-registered firms to activate their on-line fees payment account. All firms are automatically pre-registered for the system; they just need to activate their accounts. If firms prefer not to use the online system, they must complete and return a form to ‘de-register’. Not entirely unreasonably, one or two busy brokers have read this as meaning they must de-register as an FCA authorised firm, not only as a user of the on-line payment system. I imagine activation levels are impressively high!

    Of course small businesses can always finance the equipment they need without having to go through piles of compliance paperwork by leasing it. That is until the new international leases accounting regulation - bound to be replicated in UK accounting rules over time - puts even that at risk; but more on that in my other articles.

    I don’t regret for a moment leaving employment to set up my own business and it’s entirely reasonable for some compliance work to come with it. It would just help if the compliance systems were designed to be easy to use and had complete and accurate guidance notes. Companies House sets a high standard, HMRC needs to learn from it.

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