London’s small businesses have been urged to seek professional advice over tax after a report revealed billions of pounds will be wasted on unnecessary payments this year.
The UK’s SMEs will spend £7.15bn more than necessary on tax this year, according to unbiased.co.uk’s Small Business Tax Action Report. This means the average small business will put £1,589 more into the taxman’s pockets than they need to.
Incorporation tax wastage, such as when a small firm does not become a limited company or limited liability partnership, will result in £4.22bn of unnecessary payments being made this year, the report said. Some 1.3 million firms could benefit from income tax breaks and savings on national insurance contributions by taking this step.
Martin Dunne, partner at City-based chartered accounts, tax and businesses advisers Sayers Butterworth LLP, recommended SMEs get professional advice on their tax issues – although he joked “that won’t come as a great surprise”.
“Tax is quite complicated, it is a specialist subject in its own right for a reason and a lot of expensive professionals in London get paid for that,” said Dunne. “Therefore, whoever tries to assume they can do it themselves is arguably taking a risk in that they may potentially over-claim on tax relief. They could then be hit by interest and penalties.”
Dunne warned that the Inland Revenue would not look upon amateurish mistakes sympathetically if a small business made a mess of their tax returns and ended up paying too little.
“The penalties can be up to 100 per cent of the tax you should have paid, but that penalty is unusual. You would need to be deliberate and fraudulent to get to that level. The Revenue will penalise you for even an innocent mistake – ignorance is no excuse.
“If you have made the same mistake repeatedly then you will be hit two or three times over. But you may under-claim and you may be entitled to tax relief on things that you would not have realised.”
Dunne also touched upon some of the quirks of the tax system which meant partners with a number of business interests could easily make errors without professional advice.
“When you get to the larger side of things, once you make profits for one company of more than £1.5m then you have to start paying corporation tax on a quarterly basis. It is the sort of thing many businesses would not recognise, but if you don’t then you can be clobbered by the taxman. It is very easily done.
“It becomes more complicated because if there are two companies involved then the threshold could be £750,000, while it could be £500,000 for three companies, and so on.”