August 2 2011.

HM Revenue and Custom's (HMRC's) inefficiencies revealed to Treasury sub-committee as research shows tax administration is the top red tape burden for SMEs

The Forum of Private Business has told a Treasury sub-committee that HMRC is failing in its aim to create a more efficient tax system because it is bogged down in bureaucracy - including complex and unwieldy online procedures.

The warning follows the Forum's latest Cost of Compliance Referendum survey, which reveals that tax administration has become the main bureaucratic barrier to doing business for the UK's small firms - forming £5.1 billion of their annual £16.8 billion red tape bill.

At a meeting of the Joint VAT Consultative Committee last year, the Forum's tax adviser Andrew Needham was astounded when he was told that a relatively simple change to email alerts to inform business owners of a change to the deadline for accepting VAT cheque payments would take six months to implement because of procedural restrictions - too late to warn them in time. Fortunately, following political pressure, the changes were made.

Speaking in the wake of the weekend's Treasury sub-committee report into the 'administration and effectiveness of HMRC', which blasted its poor levels of service and led Chairman Mike Clasper to publicly apologise, Mr Needham said that problems were widespread.

"For example, businesses can be selected for what is called 'extended verification' before being registered for VAT, said Mr Needham, of VAT Specialists Ltd.

"Their forms are sent to a specialist team in Cardiff and the process is supposed to take 50 days, but I know of at least one case that was sent in September 2009.

"About 18% of applications are selected for extended verification - so one in five are taken out of the normal system and placed in one where it takes a minimum of 50 days to process them.

"Often forms go back and forth continually when there are minor issues, with little common sense employed.

"There are an awful lot of business owners who are in no way involved in fraud or anything dodgy that nevertheless have their VAT registrations delayed."

Unanswered calls
Despite the apparent inefficiency of its online communications and email services, the sub-committee also found evidence of significant failings in HMRC's call handling abilities.

The finding follows figures from the National Audit Office (NAO) in January 2010 which showed that 44 million calls to the taxman went unanswered in a single year, including many during busy tax return periods. In all, HMRC failed to pick up 43% of the 103 million calls it received in 2008-2009.

"That's beyond pathetic," added Mr Needham. "In fairness, they are trying and things have improved since then but still there are around one in three calls are not being picked up, and when they there's no guarantee you will get a coherent answer.

"There's such a lack of planning - they knew, for example, that electronic VAT returns were being introduced so why no staff training or automated systems were put in place is mystifying."

Root-and-branch overhaul of the tax system
As part of a root-and-branch overhaul of tax system to free small firms to grow and create jobs the Forum wants HMRC's service to be made quicker and more efficient, with much-improved communication and simplification of its online procedures.

The not-for-profit organisation is also calling for major reforms to PAYE - with the sub-committee reporting that many of the unanswered calls related to National Insurance (NI) and PAYE changes - and to the treatment of customers in line with its own customer charter.

In particular, there are concerns that HMRC's sector-by-sector clampdown on tax avoidance is unfairly focusing on small firms rather than large companies - the real culprits - because they are seen a easy targets. The Treasury sub-committee noted that one area in which HMRC is strong is tax collection.

Despite recognising some improvements - including recruiting 1000 additional contact centre advisers to handle calls during exceptionally busy periods - the committee expressed concerns that HMRC's local tax office closure programme and job cuts could mean its service declines further, and undermine improvements seen in voluntary tax compliance.

A recent survey carried out by the Forum suggests that, surprisingly, business owners would be willing to pay even more in tax in exchange for a simplified system that saves them money in the long run.

Forum member Pat Cobham, of Cobham Day Ltd in Liverpool, is particularly frustrated at changes making the administration of PAYE more difficult and believes HMRC's targeted investigations are unfair.

"Once again HMRC are hitting the little guys. Small businesses are struggling to keep their heads above water and what does HMRC do to help? They introduce yet another raft of penalties," she said.

"Late monthly PAYE payments now attract penalties at a time when cash flow for small businesses is the worst it has been in 20 years. In the good old days tax inspectors actually tried to help the tax-paying public by providing advice. They used to be called the Civil Service. We now get no service at all - we are just battered by rising compliance costs."

The Treasury sub-committee has recommended fifty measures to improve the service.

Reducing the burden of tax and tax administration to foster business growth and employment is one of the key elements of the Forum's Get Britain Trading campaign.

In addition, Forum members taking part in the organisation's Business Buddy scheme are being invited to discuss their taxation problems with their local political representatives.

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