Tax Small Business Advice

British SMEs spend 12 working days per year on tax compliance

28 Feb 2018

British SMEs spend the equivalent of almost three working weeks every year navigating complex tax reporting processes, according to the Federation for Small Businesses (FSB).

The UK’s average small business tally £5,000 per year on tax compliance as they burn through an average of 95 man-hours every year to file their returns - the equivalent of 12 eight-hour working days.

It appears there are several hurdles facing small businesses face when trying to pay taxes.

For one, almost half say determining the tax rates at which they’re required to pay is a challenge. Furthermore, 40% of business owners find exemptions confusing, while VAT, PAYE & NIC are identified as the most time-consuming taxes to handle.

Almost half of small firms say business rates have made growing their firm more difficult. The same proportion say corporation tax has hampered expansion, with similar numbers stating that growth has been stifled by Employers NICs. One in seven small firms say VAT has prevented expansion completely.

When asked about changes that would reduce the tax compliance burden, the majority say the ability to pay in installments would make the process more straightforward.

A similar proportion would like to see an early estimation of their tax bill, while 40% state that the automation of tax calculations would be useful.

Time spent on tax equals time lost on business

Time and money spent by small businesses on navigating the tax system is time and money not spent on innovating, expanding and creating jobs.

With many business owners believing their skills are needed to complete the majority of tasks faced by a business, these new figures show how small businesses can be much better off in outsourcing their tax filing obligations.

As a small business accountant with experience of working with over 10,000 SMEs, our team of tax experts are equipped to provide fixed-price tax, accounting and business planning services that are specifically geared towards supporting the growth of Britain’s SMEs. Try our instant accounting quote tool and get a fee in just 5 clicks.

Small firms by and large understand a tax like VAT, for example, but the sheer complexity of VAT administration means they spend 44 hours a year filing returns.

The three working weeks and thousands of pounds a year that small firms lose to tax compliance is a huge drain on national productivity. That lost time and resource is the real issue, not the length of the tax code.

The roll-out of Making Tax Digital (MTD) needs to be seen as an opportunity to radically improve the small business user experience of HMRC. Done right, MTD could help streamline the process of small business tax compliance.

SMEs left in the dark over tax breaks

According to the same research from FSB, the majority of small firms are not aware of tax reliefs available to them.

A number of reliefs have very low uptake among small firms, including the business rates relief offered to those based in Enterprise Zones. More than 70% have not made use of, or even heard of, this relief.

The same proportion are not aware of the Enhanced Capital Allowance, which encourages investment in clean technologies.

The most familiar tax reliefs to small firms are small business rates relief, which more than three quarters are aware of or have claimed. The dividend allowance is also popular among small businesses.

However, tax administration still suffers from a complex tax code which remains more than 10 million words long, 12 times the length of the King James Bible, according to the Institute of Chartered Accountants.

Almost half of firms struggle to work out what rate of tax they should pay, the FSB survey shows. Meanwhile, two in five firms say they find exemptions confusing, with business rates relief offered to those based in so-called enterprise zones among the exemptions with the lowest take-up.

How much do entrepreneurs value their time?

The revelation of time spent on tax compliance ties into the value of an entrepreneur's time and how they allocate their efforts on a daily basis.

That's where opportunity management, having a productivity system with regimented rules in place and being willing to hire help comes into play.

In whatever ways you can, in your business, you need to seek leverage. In terms of work productivity, leverage is, in essence, the difference between the base cost for your hour and the amount of money you get for it or from it.

One good way to evaluate your personal effectiveness is measuring and monitoring this differential, hour by hour, for a week.

Since you are your own boss, you write your own paycheck and you decide how much that pay is going to be. For a lot of entrepreneurs, that number is whatever is left.

This is a huge mistake for two reasons: It indicates zero planning, and it means you pay yourself last - the number-one reason entrepreneurs wind up broke.

So, let's reverse all that and start with the planning.

You've got to decide how much money you're going to take out of your business or businesses this year in salary, perks, contributions to retirement plans and so on. What is that number?

80% of entrepreneurs don’t know what their time is worth

Research has shown that roughly four in five entrepreneurs don’t know what this number is and, therefore, cannot calculate what their time is worth.

More problems tend to stem from here - primarily, they cannot make good decisions about the investment of their time, which means they're not exercising any real control over their business at all.

You may not have a situation that lends itself to clear-cut billable hours, so how can this strategy work for you?

Let's say you own six stores and each of them has a dedicated manager. You'll have to decide how much of the business's profit goal will be provided by the managers and how much is still inextricably linked to you.

If you want £500,000 at the bottom line, and you figure half is dependent on you, then simple maths says you've got a £250,000 target.

It may not be such an exact science but, as a general target that’s a good start. Coming up with a number, even through basic calculations, is a lot better than not having a number to work around.

Having a target gives you guidance. It will make a change to many of the decisions you make, the habits you cultivate and people you associate with, and the benefits will be clear over time.