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Helping newly registered businesses meet their tax obligations

Newly registered businesses are more likely than established businesses to get their tax affairs wrong, but if they are helped to get it right first time they are likely to continue to comply in the future. A report from the National Audit Office today puts forward a series of recommendations to encourage improved compliance by new businesses, including making registration easier, coordinating the help available through different organisations, and in the longer term, moving towards a unique identifier for each business.

HM Revenue and Customs was formed in 2005 and is currently developing a new strategy for the help it provides to all types of businesses. It aims to make it as easy as possible for businesses to comply by providing simple processes for registering; accessible and easy to understand guidance; and forms that are straightforward to complete. It provides a wide range of help through its website, printed guidance, telephone helplines, workshops and seminars.

Our work with the Department found that the proportion of new businesses filing their tax returns on time is lower than for the business population as a whole. Improving the filing performance of new businesses to the level of the general business population would lead to an additional 119,000 returns submitted on time, reduce the penalties paid by these businesses and reduce the costs of pursuing outstanding returns. There are also opportunities to improve the proportion of businesses paying the correct amount of tax.

The Department’s initiatives to increase the numbers filing returns and paying their taxes on time have met with some success. It does nevertheless need a better understanding of the track record of businesses in complying, the types of help that improve compliance and the cost-effectiveness of that help.

The NAO has drawn up a short list of recommendations which could improve the compliance of new businesses, including some which could be implemented quickly and at low cost, and others which would require more substantial resources but could bring significant long-term benefits.

In the short-term, the NAO proposes that HM Revenue and Customs should target its help at those businesses most likely to benefit from it, such as those entirely new to business and encourage businesses to use the email tax alert system at http://www.businesslink.gov.uk/. It could also work more closely with other organisations, such as tax agents, Business Link and financial institutions, to coordinate the help available to new businesses and to increase awareness of the various tax simplification schemes.

In the longer term, there would be benefits for the Department and businesses in introducing a single online tax registration for businesses and a unique identifier for each business, which are used in other countries such as Canada and Australia. A unique identifier would link data on individual businesses across the different tax computer systems and help to give a clearer view of an individual business’ entire tax affairs. It would however take some time to introduce and involve significant costs.

"Newly registered businesses are a diverse group, ranging from those setting up in business for the first time to those with previous business experience, so increasing tax compliance among this group requires a flexible approach which targets the differing needs of businesses. Pursuing the recommendations highlighted in this study will help HM Revenue and Customs in further improving the ability of new businesses to deal with their tax affairs.

Introducing a unique tax identifier would require substantial resources but could also result in substantial benefits, enabling HMRC to view the entire tax affairs of individual businesses and achieve a better understanding of the needs of different groups of taxpayers."

Sir John Bourn, head of the National Audit Office

Notes for Editors

  1. Around 700,000 new businesses start up each year. They have to register with HM Revenue and Customs for different taxes as they become liable to pay them. When they set up they become liable for Income Tax or Corporation Tax. As they take on employees, they will need to pay PAYE and, if their turnover exceeds £61,000, they become liable for VAT. The Department requires them to register for most taxes separately. This leads to around 1.2 million new tax registration applications a year.
  2. Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained from The Stationery Office on 0845 702 3474.
  3. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office which employs some 850 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

PN: 66/06