On 8 September 2015 HMRC published on its website research on understanding the impact of reporting cycles. This examined the business experience and compliance behaviour of small and medium sized enterprises (SMEs) and asked for information on the attitude to the possibility of more frequent reporting and payment.

HMRC considers that there is evidence that small and medium enterprises comply better with their tax obligations if their tax reporting cycles are better aligned with their business activities. SMEs currently report tax liabilities and make tax payments according to various cycles ranging from weekly to annually.

Research was conducted into how tax reporting currently fits into business cycles and what are the practical implications of introducing more frequent reporting and payment. The research was conducted initially through telephone interviews with a number of SMEs. These were followed up by face to face meetings with a selected number of those SMEs.

Generally the SMEs felt that they had adapted their systems to fit in with tax payment cycles and that the business and tax cycles fitted well. The approaches to tax reporting and payment by an SME depended on size, turnover, complexity, cash flow, financial confidence and degree of organization.

There appear to be four different types of SME from this point of view: simple; more complex and structured; cash flow conscious; and open to improvement. These types of business could be identified by sector, for example cash flow conscious businesses typically come from sectors that have a variable or seasonal nature, or from age of the business, as for example new businesses would be open to improvement.

Attitude to more frequent tax reporting and payments

The SMEs were generally satisfied that their reporting cycles are currently adapted to their business cycles. However some suggested possible improvements such as automation of processes via more integrated systems and linking the data required for tax reporting to the production of data that would be useful for the business. Some businesses considered that more frequent tax payments could improve their cash flow and avoid shocks. Some however were concerned with losing the interest on money set aside for tax payments.

More frequent tax reporting was associated with a higher compliance burden. Most SMEs saw no obvious benefits from more frequent tax reporting but a few considered that breaking down the reporting could give them a picture of their business that was closer to real time. The simplest businesses saw no advantage in more frequent reporting and payment, and similarly the more complex and structured SMEs felt that they already had systems in place that suited their needs so they would be reluctant to change this.

SMEs generally considered that frequent payment was useful for managing cash flow but had concerns about practical implementation. More frequent tax reporting on the other hand was seen as an additional compliance burden and resented by the simplest businesses as an additional form of control.

Those businesses considered to be open to improvement were optimistic that frequent reporting would help with the accuracy of their returns and control of the business. Businesses that had already been operating on more frequent tax reporting cycles considered that this had helped them to improve their financial position and align tax and business cycles.

Integrated system for tax payment and reporting

The research revealed that SMEs want an integrated system for tax reporting and payment. This would need to be user friendly and adapted for the needs of their business. It could possibly cut costs through reducing the need for support from an accountant. Data security was an important issue and in the case of more complex and structured businesses software compatibility was important as an integrated reporting system would need to fit into their existing systems. Businesses that were open to improvement were concerned about a transition to more frequent reporting and expected support from HMRC.

Communications by HMRC

Simple businesses would need reassurance that a change to more frequent reporting would not be a burden and they would be supported by HMRC. The more complex businesses would need to be assured of the benefits of a new system while the cash flow conscious SMEs would need a system to help their ability to manage cash flow. The businesses that are open to improvement would appreciate the benefits of a new system if they could be assured that the transition would be efficient and supported by HMRC. Communications from HMRC could therefore be tailored to the business type.