On last month's Tax Day (March 23) the Treasury proposed bringing forward the payment of income tax self-assessment and corporation tax for small businesses.
It aims to bring the calculation and payment of tax closer to the point where income and profit arises, akin to the pay as you earn style system for employed people.
The government believes the move will help close the tax gap, which at £31bn already sits at a record low, as less money will get lost due to human error.
But some warn the move could create problems for small businesses and the self-employed.
“Employees do not take risks and do not have conflicting calls on available cash that someone running a business will have,” said Chris Denning, head of corporate and international tax at MacIntyre Hudson.
“An immediate change to a real-time payment basis could therefore cause significant cashflow problems for businesses in the short term.”
Cashflow will be different in certain sectors, such as retail, where the bulk of profitability occurs at Christmas trading, and there is a threat some smaller businesses could be disadvantaged in how they pay tax, including advice firms.
“Smaller companies, which many advice firms are, will find it hard to plan capital expenditure and it’s likely to complicate their regulatory reporting,” said Dennis Hall, CEO of Yellowtail Financial Planning.
“It will add costs and restrict cashflow and may impact capital adequacy arrangements.
"The Treasury and government don’t have a good track record of truly understanding how the wider economy really works, particularly at a smaller company level where business owners from time to time operate on a hand to mouth basis.”
Tom Selby, senior analyst at AJ Bell, believes the self-employed could benefit from the change.
He said: “While I know some concerns have been raised around moving to a ‘pay as you go’ tax system – particularly if it leads to overpayment by self-employed workers – attempting to ensure taxes are paid ‘real-time’ feels like a step in the right direction.
“Some £3.1bn of this [£31bn tax gap] is down to human error, so ministers will hope the shift in approach outlined on Tax Day can help fix some of the holes cash currently escapes through.”
He added: “Provided any wrinkles in the application of more timely payments can be ironed out, there could also be clear benefits to self-employed workers of tax bills that are smoothed over the course of the year. Most obviously, more regular tax bills should make it easier to budget and plan for the future.”
It remains to be seen how businesses will react to such a change to payment schedules.
The consultation is currently at the call for evidence stage and will remain so until July 13, 2021. If this change does end up happening, Denning hopes the government realises the pressure this could put on some businesses.
“In the longer term and from a cashflow management perspective, it may better suit businesses to pay tax on an ongoing basis rather than being faced with having to finance a large bill once or twice a year,” he said.
“If the government does go down this route a key issue will therefore be a transition mechanism that does not cause severe cash flow problems for taxpayers as they go through the change.”
A quiet ‘Tax Day’
Over 30 consultations were issued on Tax Day (March 23) but many in the industry have been surprised by what the government has chosen not to consult on.
Reforming payment of taxes, and making them timelier, might help alleviate some current pressures in the tax gap but there are concerns as to why the government is taking this route.
“It is disappointing that underlying simplification of the tax rules, to make it easier for taxpayers to understand their liability, is not being considered before digitalisation and earlier payment,” said Caroline Miskin, manager of tax practitioner support at the ICAEW’s Tax Faculty.
“HMRC is currently failing to provide an adequate level of customer service and increasing the number of touchpoints between taxpayers, agents and HMRC is only likely to add further pressure, even if more contact moves online.”
Jon Yarker is a freelance reporter for FTAdviser
