RTI pushes compliance costs upwards

Tuesday 9 July 2013

Contractors, freelancers and sole traders are all keenly aware of the tax and reporting demands made of them by HMRC - especially if they take care of their own tax affairs. But it appears that the UK’s smallest businesses are becoming less inclined to do so, as a new study has found that tax compliance is costing small firms millions.

Research carried out by the Forum of Private Business (FPB) estimated that on the whole, compliance cost small UK businesses a total of £18.2 billion, up 8.5 per cent compared to two years ago. Of this, the single biggest outlay was for tax compliance, which FPB says is largely down to the introduction of real-time information reporting (RTI).

In the build-up to the introduction of the procedure earlier this year, HMRC said that RTI would reduce the administrative burden faced by small businesses at the end of every financial year. Rather than waiting to submit tax information on an annual basis, the new rule requires employers to send payroll and pay as you earn (PAYE) tax data to HMRC on or before the date on which staff are paid.

Every employer in the UK is required to use the new system, but a number of companies have been granted some breathing space. After HMRC accepted that because some firms that pay staff more than once a month they may need more time to adapt, it granted a six-month grace period to smaller businesses that needed the time to get their processes in order. As a result, for certain small companies the deadline for compliance was pushed back from April to October.

Even so, FPB suggests that a number of small companies are having difficulty in handling the procedure themselves, whether through lack of knowledge or insufficient time and resources. This would perhaps explain why firms are paying 11 per cent more to external payroll and specialist accountancy services than they did two years ago.

“The logic here seems to be to pay an expert to do a job they can no longer do themselves, for whatever reason that may be,” said Robert Downes, FPB policy adviser.

Before RTI was rolled out in April, HMRC claimed that it expected the changes to cost smaller firms a total of £120 million. But, despite all of the government’s promises to lighten the bureaucratic load on UK companies, FPB calculates the scheme has cost as much as £311 million - more than two and a half times the taxman’s estimate. On top of this, the potential penalties in the event of non-compliance are a cause for concern among many limited company contractors and sole traders. Perhaps, then, it is not surprising that businesses are becoming more willing to let specialist contractor accountancy services take the strain.

There were other causes for concern among businesses, which ranked employment law and health and safety as the second and third most expensive business compliance areas. However, in-house health and safety costs did fall slightly compared to 2011 levels - a trend which FPB expects to continue when new legislation comes in later this year.


By Victoria McDonnell

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