Tax system unhelpful for SME growth, MPs hear

The Business and Trade Committee took evidence on Tuesday 2 September as part of its inquiry into small business strategy, focusing on whether the current tax system supports growth. The witnesses were: 

• Jonathan Athow, Director General for Customer Strategy and Tax Design at HMRC 
• Alice Jeffries, Tax Policy Manager at the CBI 
• Alison Kerrey, Chair of the Joint CIOT/ATT Digitalisation and Agent Services Committee (giving evidence on behalf of the CIOT) 

Committee members questioned whether the system encourages or inhibits business expansion. Asked if the current structure was “best for growth”, Alice Jeffries said: “There is a simple answer on that, which is no.” She pointed to problems with VAT fraud and administrative burdens, adding: “We need to think about why businesses might choose those routes and whether that is because they are scared of the level of admin they will have to do when they engage with HMRC for the first time.” 

The Committee explored “cliff edges” in tax design. On the VAT registration threshold, Jeffries noted: “People simply choose not to get registered and go into that system. They fear the admin burden… and that they will make themselves uncompetitive.” Similar issues arise with business rates, where crossing a threshold means losing relief entirely. “That can discourage small businesses from expanding into better-quality premises or investing in their premises,” she said. 

Alison Kerrey agreed, telling MPs she does not think the current tax system is “good for growth.” She highlighted the importance of stability, saying: “One of the barriers to growth… is around a lack of consistency and certainty. That is the message that we get frequently from all sizes of business when we talk about what they want out of a tax system.” 

Questioned on HMRC’s role in shaping a tax system for small businesses, Jonathan Athow said their role was to administer policy rather than set it, but acknowledged the trade-offs around thresholds. “You can see… a bunching of businesses below the VAT threshold. That is some element of distortion,” he said. Options included raising, lowering or tapering the threshold, though he stressed that each involved complexity or cost. “Ultimately, they will be decisions for ministers,” he added. 

Making Tax Digital 

The session also examined digitalisation. Athow said HMRC wanted more businesses using software early on, as the Making Tax Digital scheme was rolled out. “That software is good in terms of tax compliance,” he said. “We found, when we introduced Making Tax Digital for VAT, that businesses also reported that it gave them a better understanding of their business.” 

However, concerns remain about readiness for the new regime, which begins next April for those with income above £50,000. Jeffries warned: “Even if you are the most informed, prepared small business in the world… you now basically have about six months to get everything ready.” She called for a “much longer tail in terms of the soft landing”. 

Kerrey stressed that any new obligations should be designed from an end-user perspective. “If Government are thinking of making a change, they should think about that change from an end-user point of view,” she said. “Too often we see costs underestimated and businesses unable to get hold of the benefits, particularly around digital if they are not particularly digitally aware at the start.” 

HMRC customer service 

Athow said average call wait times were now around 13 minutes and that 83% of calls were being answered, up from about 50% last year. Asked why the target was 85% rather than 100%, he replied: “That is the agreement we have reached with the Treasury about where we are. That is the level we are funded to.” He estimated that 3–4 million calls still go unanswered each year. 

Other issues 

On compliance, MPs raised concerns about the small business tax gap, which reached £28 billion in 2023–24. Athow said under-reporting of income and poor record keeping were major factors, noting that improved software and real-time nudges could help. “Part of using software is that we can actually build those nudges in in real time,” he said. “We are very keen to go down that route.” 

When asked what single change would most help small businesses, Kerrey said: “Stop tinkering with the tax system and give people the certainty.” Jeffries called for corporation tax systems to be redesigned so that they integrate with VAT and income tax software, and for penalties on those with no tax liability to be abolished. 

Read the full transcript here.