The UK tax authority HMRC has published a research report entitled Small Business and Choice, reflecting interviews held with small businesses and their views on choice in the tax system. HMRC authorized the research to be done in order to explore the views of small businesses on being offered choice in how to meet their tax obligations.

The issues covered by the research were business awareness of particular simplification measures such as cash basis, simplified expenses, the VAT flat rate scheme, and the annual accounting and cash accounting VAT schemes. The research looked at business awareness of the schemes and how and why decisions were made on the choices available. HMRC looked at how to present the measures and give support to enable businesses to choose the schemes that were most appropriate for them. The views of businesses were sought on models for offering choice in the management of their tax affairs and the potential impact.

Around fifty businesses were interviewed including new and recently established businesses and some that had been trading for more than three years. Around three quarters of the businesses interviewed had a turnover under GBP 80,000 with around a quarter with a turnover above that level. Around half were using a paid agent or informal agent and around half were not using an agent. Thirty sole traders, five partnerships and fifteen limited companies were interviewed in conducting the research.

The results showed that although businesses were aware of one or more simplification measures they were generally passive in their decision making, accepting the suggestion of an agent or HMRC. Some smaller businesses with less experience and less confidence in managing their tax affairs were not aware of the measures and had not therefore gone through any decision making process on simplification measures.

Businesses would generally gain information on the simplification measures from a business associate, an agent or the HMRC website. Both agents and the HMRC website were viewed as authoritative but some smaller businesses deferred to the agent’s choice without discussion while some more experienced businesses would discuss choices with the agent and take an active role in the decision making process.

In taking a decision businesses considered whether it would save them time, which is very important to start ups and other new businesses. They also considered the financial benefits of the decision. Finally they reviewed whether this would help them to meet their tax obligations without error. Flat rate schemes were viewed as helpful in combining simplicity with certainty that the tax obligations were correctly complied with.

The small businesses valued choice in managing tax affairs which enables them to keep control over business decisions. This could be done by giving flexibility of choice through a personalized approach. The choice should however be limited to a few suitable alternatives and most of the businesses would welcome a suggestion from HMRC to put them in the right direction. This would provide guidance while allowing them to keep control of their decision making.

Information from HMRC would need to be clear and tailored to the situation of each business. A good example of this was the “Your Tax Account” online service. Information currently available from the website was seen as less helpful owing to the difficulty of finding the appropriate information.

The businesses also considered that HMRC could play a greater role in providing information to businesses online, in emails or letters or through seminars. The HMRC seminars attended by new businesses were valued by those who had attended them. It was suggested that information could be provided to businesses when logging on to file a tax return; registering for VAT; at the end of the first year of trading; or when turnover reaches certain levels.

A minority of businesses were however distrustful of the process of engaging with HMRC or did not have confidence in their ability to make choices on managing their tax. These businesses preferred to let their agents take the tax decisions or let HMRC take the decision for them.

The attitude of business to the role of HMRC in their tax decisions depended on how confident they were in making tax decisions; the amount of control the businesses wanted; the extent of trust in HMRC to assess business needs; the perceived accessibility of the information from HMRC; and the time required and cost for the business.