Tax red tape’s huge cost to small firms revealed

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A new report has highlighted the staggering burden of tax compliance being placed on small businesses in the UK today.

The cost of tax compliance to the small business community amounts to nearly £25billion per year, according to the Federation of Small Businesses (FSB).

Small business owners spend an average of 44 hours per year on tax admin, while three in five say dealing with HMRC has caused their personal stress levels to rise

FSB is calling for the cost of tax compliance to be lowered by a third, a time limit to be set on tax investigations, and for HMRC to speed up replies to customer queries.

Tax compliance costs small businesses nearly £25billion a year, while three in five small business owners report that dealing with HMRC has increased their personal stress.

The findings, from a survey of over 1,400 small business owners, come from a new report by the Federation of Small Businesses (FSB), Taking a Toll: Small businesses and the cost of tax compliance.

The report tallies up the demands – in terms of stress and time, as well as the financial costs – levied upon small business owners when they engage with the tax system.

These costs fall not just on small business owners; by holding back productivity and reducing the time and funding small firms have for investment, they are also hampering overall economic growth.

The average small firm spends £4,500 and 44 hours a year on tax compliance, according to the research. These annual totals could include time spent trying to contact HMRC, the cost of staff time used to manage compliance, and the price of software subscriptions and/or an external accountant, among other outlays.

Poor levels of customer service from HMRC are a recurring theme within the report, making tax compliance, already a demanding task, even more difficult and stressful, and using up time that would be far better spent developing business operations.

More than half of small firms find HMRC difficult to contact. The telephone was the most popular method of communication with the tax authority, used by over two thirds but only a quarter of that group rated their experience of dealing with HMRC over the phone as good.

Given that, it is not surprising that three in five small business owners say that dealing with HMRC has raised their personal stress levels.

HMRC’s ongoing Making Tax Digital (MTD) programme, which aims to move businesses over to filing their taxes digitally, will be expanding its net as of April next year.

After that date, all businesses with turnover above £50,000 will be required to have moved over to MTD for income tax self-assessment, while those with turnover between £30,000-£50,000 will have until April 2027 to make the switch.

However, despite the looming deadline, over a quarter of small firms who will be caught up in MTD eligibility say they do not know when they plan to adopt MTD-compatible software, driving concerns of a digital gap.

Tina McKenzie, FSBs policy chair, said: “Tax compliance is far from a niche issue – it affects all five and a half million small businesses in the UK, costing them £4,500 and 44 hours a year each on average. Collectively, that adds up to an annual total cost to the small business community of nearly £25bn and over 240 million hours.

“This is money and time that could be far, far better spent on building up their business, and the overall cost to the economy in terms of lost growth and wasted productivity is enormous.

“Given the challenges facing the economy, and the need for growth, reducing the burden placed on small firms by tax compliance must be a priority – something the government has recognised as a priority for other regulators. HMRC should be included in the government’s drive to make regulation better support growth.”

She added: “We all deserve a tax system that is fit for purpose, overseen by a tax authority which takes steps to make compliance as simple and painless as possible. But at the moment, many small businesses encounter just the opposite.”

• The report sets out a series of recommendations including setting a target to reduce business tax administration costs by a third by 2028 and imposing a “duty of candour” on HMRC’s tax compliance officers, requiring them to be open and honest about mistakes.
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FSB also wants a time limit on the length of HMRC tax investigations and a review of the pricing of Making Tax Digital-compliant software as part of the evaluation of the programme, and, if needed, regulation to limit price increases.

• To discuss any issues raised by this article or any tax issues affecting you please contact me on 01772 430000

Defence boost but growth forecast falls

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Chancellor Rachel Reeves confirmed a £2.2bn defence spending boost in her Spring Statement however it came on the back of a disappointing fall in forecasted economic growth.

As widely predicted, there were no further tax increases or surprises for businesses, who were hit hard by the chancellor’s autumn Budget with its employers’ NI hike and a record £40bn in tax rises.

However, the forecast from the Office for Budget Responsibility (OBR) halved the UK’s growth in 2025 from two per cent to one per cent.

And since the statement, the UK and the world’s economy has been hit by American President Donald Trump’s global tariffs. His move will see a 10 per cent tariff on all UK exports to the US.

The OBR has cautioned that becoming embroiled in a trade war could undo the £9.9bn headroom the chancellor has built into the economy.

The situation around growth and economic uncertainty has led some experts to warn that the government might have to raise taxes later in the year, if the economy and public finances get worse.

The Institute for Fiscal Studies said the chances of Rachel Reeves meeting her fiscal rules were ‘a coin toss’ and there was a “good chance” that the economic forecast will “deteriorate”.

In her statement, the chancellor said that defence spending will increase to 2.5 per cent of GDP from April 2027, by reducing overseas aid to 0.3 per cent of gross national income.

Confirming an additional £2.2bn in spending for the Ministry of Defence next year, she said it was necessary because of the need to move quickly in a “changing world”.

She said that she wanted the “whole country” to feel the benefits of the increase.

The chancellor said the government was also taking forward work to “significantly reduce the costs of running government” by 15 per cent, or £2bn, by the end of the decade. She said that the state can be “leaner and more agile”.

She also told the Commons that the OBR had assessed that Labour’s planning reforms “will lead to housebuilding reaching a 40 year high”.

Changes to the national planning policy alone, she said, will help build more than 1.3 million homes in the UK within the next five years.

This will take Labour within “touching distance” of its promise to build 1.5 million homes in England this parliament, she added.

She said the government’s plan to get Britain building will drive growth in the economy and put more money in people’s pockets.

MPs were told it was not right people were evading tax. The autumn Budget contained measures to raise £6.5bn by a crackdown on tax avoidance and evasion by the end of the forecast period. The chancellor said new measures would increase this by £1bn.

Urgent need for business rates reform

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The government has confirmed its commitment to reforming the current business rates system though for many it is not moving forward quickly enough.

The chancellor’s spring statement announced that an interim report on the future of the system will be published in the summer.

However, no details of the proposed changes are set to be announced until the next autumn Budget later this year.

For the time being retail, hospitality and leisure businesses will be given a 40 per cent relief on their business rates in 2025/26.

And the small business tax multiplier for properties with a rateable value below £51,000 will also be frozen for 2025/26.

Businesses should check that they are paying the reduced rates.

The government has been consulting for some time on longer-term measures to support the hard-pressed high street and the hospitality and leisure sectors.

And it has pledged over the course of this Parliament to create “a fairer business rates system that protects the high street, supports investment, and is fit for the 21st century.”

The call from businesses is for the government to move faster in introducing its reforms.

The Federation of Small Businesses (FSB) policy chair Tina McKenzie said: “The chancellor has rightly kept her word not to further increase business taxes and we urge her to go further in her next full Budget and actually lower the tax burden, including delivering on the promises made by Labour in opposition to transform the out-dated business rates system and make it fit for purpose in a modern economy.

“Freeing up funds for small firms to invest in their business rather than having money swallowed up in high taxes is the best way to achieve growth.”

Trade group UK Hospitality says the sector faces an additional £500m in business rates, as a result of relief being lowered from 75 per cent to 40 per cent this month.

A spokesperson said: “We are urging the government to urgently bring forward a plan for hospitality businesses that enables the sector to unlock growth and jobs.

“This plan would have to set out how the government intends to reduce the costs and red tape that plague the sector.

“This should include the Treasury ensuring its business rates reform, to be unveiled in the autumn, offers the maximum discount for hospitality businesses.”

Entrepreneur and Dragons’ Den investor Theo Paphitis is those backing the reform of the system.

The chairman of Ryman Stationery is calling for a level playing field across the retail sector and says the reform has to acknowledge the way people shop has changed.

He told the 2025 Retail Technology Show that the current system “will kill the high street on its own at some stage.”

• To discuss any issues raised by this article please contact me on 01772 430000

Angel investment programme launches

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A pioneering angel investor network has been launched in Lancashire to support early-stage business growth.

The programme, called ‘fhunded angels’, has been launched by Lancashire County Council and is thought to be the first network of its kind in the UK to be led and managed by a local authority at such a scale.

The aim is to bring ambitious startups to the attention of private investors looking for exciting ground-floor investment opportunities.

Such investors – often referred to as ‘angels’ – are typically a mix of successful entrepreneurs, exited founders, and sector specialists, with personal money to invest.

They are also all certified as either a high net worth individual, or a certified sophisticated investor, as defined by the UK Financial Promotion Order (FPO).

Those behind the initiative see angel investment as a way for Lancashire to address the chronic lack of early-stage finance available to startups more generally in the UK, especially outside London.

The amount of individual angel investments – which are usually made in return for shares in the business – are often within the £50,000-£150,000 range, but angels can also band together and invest jointly.

Co-investing with other finance providers, such as VC funds, is another way angels can help create larger investment pots.

The county council has already welcomed several investors to the network. Most have a strong connection with Lancashire, and share an interest in wanting to help boost the County’s innovation economy.

One such angel is Jeremy Gidlow, a highly successful tech entrepreneur based in Lancaster.

He said: “As someone interested in early-stage investment opportunities, especially in Lancashire’s growing tech sector, I was eager to get involved in the project.

“Now that it’s live, I am excited to work with my fellow angels to discover those dynamic and disruptive Lancashire startups that are currently under the radar.”

Any Lancashire entrepreneurs seeking angel investment – and any investors meeting the FPO’s criteria who are interested in joining the fhunded angels community – can contact the fhunded team via the fhunded website – www.fhunded.co.uk.

More support needed for the self-employed

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BETTER access to mortgages, banning “harsh” personal guarantees, and ensuring entrepreneurs can have a comfortable retirement will encourage more people to launch small businesses.

Those were just some of the findings of new research carried out by the Federation of Small Businesses (FSB).

It found that a quarter of entrepreneurs say that being self-employed has made it more difficult for them to get a mortgage, while those who do succeed in securing one are often faced with higher rates and less favourable terms.

On top of that, 16 per cent say savings or capital they would otherwise use to expand their business is being used to pay their mortgage.

Entrepreneurs are also relying on various finance options to grow or stay afloat, including bank overdrafts (17 per cent), credit cards (16 per cent), and financial support from family and friends (nine per cent).

The report also highlights that the excessive use of personal guarantees, which make borrowers personally liable for business loans, are stifling growth, with some lenders requiring them for relatively small amounts, dampening entrepreneurs’ willingness to take risks.

FSB says it has raised this issue with the Financial Conduct Authority (FCA) and is calling on the Treasury to regulate personal guarantees.

With access to finance so constrained, saving for a pension is at the back of the queue for many entrepreneurs, with 37 per cent saying that they do not contribute to a pension.

That is mainly due to cash flow constraints, a reason cited by 32 per cent of those who said they hadn’t contributed to a pension scheme in the previous year,

FSB is calling on the FCA to enforce standardised documentation requirements across lenders to simplify the mortgage application process for the self-employed.

It says a standardised approach across lenders would help the self-employed be better prepared when it comes to what information they will be required to provide to a lender.

Lenders could also be encouraged to consider offering lower mortgage rates to self-employed people who have taken out income protection insurance.

It also wants to see personal guarantees included within scope of the FCA’s Consumer Duty, in order to deter the over-use of personal guarantees by lenders.

In a statement the FSB said: “Personal guarantees have a legitimate role in lending to businesses, but their over-use can have a chilling effect on the economy, causing limited company directors to put personal assets such as their homes on the line when taking on a loan.”

The organisation is also calling for Entrepreneurs’ Relief (now called Business Asset Disposal Relief) to be maintained at 14 per cent in the long run.

It is currently due to increase from 10 per cent to 14 per cent in April this year and then to 18 per cent in April 2026.

Many self-employed business owners struggle to make regular pension savings, so this relief is often key to funding their retirements, as well as encouraging investment in small businesses.

Tina McKenzie, FSB’s policy chair, said: “People who decide to take a leap into the unknown by embracing entrepreneurship are taking on many risks – not least that of no longer being able to rely on a secure income.

“Income volatility adds additional barriers to accessing finance products, such as mortgages and external finance for their business, and makes saving for a pension harder.

“The impact of this should be minimised to encourage more people to take the leap without worrying that they will be locked out of common financial milestones as a result.

“The dream of owning your own home is firmly entrenched in our national culture, while we all aspire to a comfortable retirement – but these things should not be a privilege reserved for those in conventional employment.”

She added: “By solving the finance conundrum too many entrepreneurs find themselves in, we can help to unlock the growth we need to get the economy on track.”

• To discuss any issues raised in this article please contact me on 01772 430000

NI state pension top-up deadline looms

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People looking to maximise their state pension by plugging gaps in their National Insurance record have contributed to a total of 68,673 years, worth £35 million, since April last year.

HMRC’s analysis of the digital service available to fill gaps has shown that more than 37,000 online payments have been made.

The average online top-up payment is £1,835 and the largest weekly State Pension increase is £113.76.

HMRC and Department for Work and Pensions (DWP) are now reminding people they only have until April 5to check their National Insurance record and fill any gaps from 6 April 2006 onwards.

From April 6, 2025, people will only be able to make voluntary National Insurance contributions for the previous six tax years, in line with normal time limits.

The ‘Check your State Pension’ forecast service on GOV.UK is the quickest and easiest way people can check what their pension will be in retirement and take action if they need to. They can also use the HMRC app to check their forecast.

Angela MacDonald, HMRC’s second permanent secretary and deputy chief executive, said: “There are just weeks left to check and fill any gaps in your National Insurance record from 2006 onwards to boost your state pension entitlement.

“Don’t delay – it is quick and easy to check your National Insurance record on GOV.UK and it could help your finances in retirement.”

Since the launch of the enhanced digital service in April last year, more than 4.3million people have used it to check their state pension forecast.

The end-to-end service means customers can also use it to check and view gaps in their National Insurance record, calculate the difference any payment will make to their state pension and then make one payment for however many years they need to top up.

Men born after April 6,1951 or women born after April 6, 1953 are eligible to make voluntary National Insurance contributions to boost their new state pension.

It is important that people look carefully at their situation and their options. Many taxpayers will have sufficient National Insurance to qualify for a full state pension without the need to pay more.

Under the new system, which was introduced in April 2016, you typically need a 35-year National Insurance contribution record to qualify for the full amount of state pension.

• To discuss any issues raised by this article please contact me on 01772 430000

Holiday lets tax advantage to end

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April will see the government’s decision to abolish the Furnished Holiday Lettings (FHL) regime put into force.

The move removes a longstanding tax advantage that treated qualifying holiday lets as trading rather than investment properties.

From April 6 2025, holiday let owners will see their properties aligned with standard residential lettings for tax purposes.

Profits will be treated as property income rather than trading income, restricting loss relief and changing the calculation of capital gains tax.

In a statement following the announcement HMRC said: “The distinction for a furnished holiday let was introduced in 1984 and provided different and more beneficial tax treatment for short-term lettings within the property investment sector.

“Repealing the beneficial tax treatment for furnished holiday lettings promotes fairness by removing the tax advantages that furnished holiday let landlords have over other residential property landlords.”

The removal of FHL will have a number of impacts. Mortgage interest on FHLs is currently treated as a deduction from rental income for income tax purposes.

From April 2025, relief will instead be given as a 20 per cent tax credit for higher and additional rate taxpayers. This means a reduction in tax relief for individuals from 40 per cent and 45 per cent respectively.

Also, FHL profits will no longer be treated as relevant earnings for the purpose of claiming tax relief on pension contributions or for Class 2 and voluntary Class 3 NIC purposes.

People currently claiming capital allowances will need to review their position, though transitional provisions protect existing allowances.

The changes particularly affect owners who had planned to claim Business Asset Disposal Relief on eventual sale.

From April 2025, the normal residential property CGT tax rate – currently 24 per cent – will apply.

The Country Land and Business Association (CLA) has condemned the move to remove FHL tax support, saying it will “punish local economies”.

Its president Victoria Vyvyan said: “For many farmers and landowners, diversification into the holiday lettings market is a business necessity.

“The short-term rental and holiday let sector contributes billions to the wider economy, supporting local shops and restaurants and creating tens of thousands of jobs.

“Abolishing the Furnished Holiday Lets regime will only punish people who are helping to grow local economies.

“It is far from a tax loophole, providing a crucial support mechanism, strengthening the resilience and viability of many rural businesses that in turn enables them to invest in their work looking after the environment and feeding the nation.

“By converting unused or underutilised properties, that may not be suitable as homes in the private rented sector, into high-quality holiday accommodations, property owners contribute to the local community’s economic vitality.”

• To discuss any issues raised by this article please contact me on 01772 430000

‘Call time on NIC hike’ say hospitality businesses

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Looming April cost increases could force 70 per cent of hospitality businesses to cut staff, new research has revealed.

Trade bodies are now calling on the government to work with them and delay employer National Insurance Contributions (NICs) threshold changes so that hospitality can continue to contribute to economic growth.

Chancellor Rachel Reeves announced in October’s budget that government would raise employer NICs to 15 per cent in April, while also lowering the threshold at which contributions are due to £5,000 from £9,100.

In addition, the national minimum wage will rise by 6.7 per cent to £12.21 an hour from April.

Businesses are warning they will be forced to make painful decisions to weather the new costs. 

A joint survey by leading hospitality trade associations has revealed how the sector fears it will be drastically affected by new employment costs and the reduction in rates relief come April.

The report reveals that 70 per cent will reduce their employment levels, risking job losses and lost income for workers.

The survey of pubs, bars, restaurants and hotels found 60 per cent looking to cancel planned investment as a result of the increased expenses while 29 per cent will reduce trading hours.

A quarter of them say they have no cash reserves left and 15 per cent believe they will have to close at least one site.

The British Beer and Pub Association, the British Institute of Innkeeping, Hospitality Ulster and UKHospitality are highlighting the strong record the sector has in delivering economic growth.

Hospitality was one of the top contributors to GDP growth in November and December 2024.

They say a delay to the changes to the employer NICs threshold would avoid the immediate impact on jobs and investment revealed in the survey. Instead, it would allow hospitality to deliver economic growth further and faster.

When asked how the government could support the sector, businesses cited a reversal of employer NIC changes as the second biggest priority after a lower rate of VAT for hospitality.

In a joint statement, the trade bodies said: “These figures should serve as a clear warning that pubs, brewers and hospitality venues will be forced to make painful decisions to weather these new costs, which will have damaging impacts on businesses, jobs and communities.

“At a time when hospitality has been one of the top contributors to economic growth, the last thing the government should be doing is piling on costs that will impact employment and cut off our ability to grow.

“We want to work with government so we can continue to vitally boost the economy, which is why we urge them to delay the changes to the employer NICs threshold. This would help save jobs and allow the sector to continue on its growth path.

“If it doesn’t act then businesses are clear that the impact on communities, employees and supply chains will be significant.

“They have warned about potential lost earnings, lost jobs, reduced trading hours and, in some cases, business failure. This would mean the loss of essential community hubs that would otherwise drive the local economy and create jobs.

“Our message to government is to delay its changes to the employer NICs threshold and allow hospitality to continue to deliver economic growth, regenerate our high streets and support local communities.”

Nearly 300 pubs closed across England and Wales in 2024 – an equivalent of six a week – according to latest figures from the British Beer and Pub Association (BBPA)

• To discuss any issues raised by this article please contact me on 01772 430000

HMRC set to end overtaxing pension issue

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HM Revenue and Customs (HMRC) is changing its systems to end emergency taxing pensioners on their retirement savings.

It has announced plans to improve tax code processing for people as they start to receive their private pension.

The changes, starting in April, aim to ensure people pay the correct amount of tax right from the beginning of their payments.

When pension freedoms were introduced in 2015, people with defined contribution (DC) pensions were permitted to take their cash out in chunks rather than having to buy an income for life.

At that time HMRC chose to apply emergency tax codes to those withdrawals, meaning that people often ended up paying more tax than they should have and then had to claim it back.

According to reports, more than 470,000 claims have been made for refunds totalling £1.37bn through the HMRC system.

Now it has announced that it will move more quickly to replace emergency tax codes with regular ones which will make sure the correct amount of tax is deducted in real time.

An HMRC spokesperson said: “From April 2025 we are improving how tax code information is used for those people who are new to receiving a private pension, so they pay the right amount of tax from the outset.

“We will automatically update the tax code for customers who are on a temporary tax code and would benefit from being on a cumulative code — this means they’ll avoid an overpayment or underpayment at the end of the year.

“There is no need to contact HMRC and once a tax code has been changed, we’ll inform customers by letter or digitally if they’ve signed up for paperless in the HMRC app or online.”

The spokesperson added: “This small change is part of our wider commitment towards improving our customer service experience.”

• To discuss any issues raised by this article please contact me on 01772 430000

Finance experts offer support

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Business owners and entrepreneurs in Lancashire are being urged to make the most of a service giving them access to a team of finance experts to help them become investment-ready, source and secure growth finance.

Access to Finance; which is part of Boost; Lancashire’s Business Growth Hub, offers fully funded, one-to-one support to ambitious companies.

It has put together a team of five advisers who will work with them to improve their financial planning, advise on the most appropriate type of growth finance, prepare funding applications and liaise directly with investors and lenders through the application process.

The team includes former bank managers, business owners, and equity advisers with a combined experience of more than 140 years across the business finance industry.

Boost’s current programme, which is funded by Lancashire County Council alongside the UK Shared Prosperity Fund (UKSPF) allocations of 10 local authorities, is currently due to end in March and businesses are being reminded to make the most of the service to support their growth ambitions.

Mark Gibbons, lead adviser at Access to Finance, said: “Recent analysis from the British Business Bank shows that external finance is on the rise among businesses both regionally and across the UK.

“We are seeing an increase in demand for finance support which is why we have invested in our team in recent months. We have five experts who can advise businesses across the full range of finance options, making sure they receive the best possible support every time they contact Boost.

“Our specialist team can help businesses of all sizes to ensure you have the correct finance in place. Get in touch to understand how our experts can support your growth ambitions.”

Access to Finance is managed by Lancashire County Council as part of Boost. Boost is funded by Lancashire County Council, the Department for Business & Trade (DBT), and UK Shared Prosperity Fund (UKSPF) allocations from ten Lancashire partner local authorities.

Businesses in Boost’s local authority partner districts can access the Access to Finance service: Blackburn with Darwen Council, Burnley, Chorley, Fylde, Hyndburn Pendle, Preston, South Ribble, West Lancashire and Wyre.

The team has expertise in supporting businesses on a range of growth strategies including gaining equity investment, supporting an acquisition, trading internationally, expanding physical space, or developing a new product or service.

In addition to one-to-one support, the service operates an Investment Academy programme, which is delivered by the Access to Finance team alongside private sector partners.

The programme is designed to help businesses understand the process of an equity raise. Expressions of interest can be accessed via the Access to Finance website.

• To discuss how we can help your business on its finance planning and scale-up journey please contact me on 01772 430000