RED TAPE JUST GOT A MILE LONGER

Scot-Buzz editor Bill Jamieson says when it comes to helping the small business sector, any connection between the world of Margaret Thatcher (RIP) and today’s Conservative Party is entirely coincidental and not to be taken seriously...

Effective from this week, the biggest employment tax shake-up in 70 years is set to create substantial extra work and costs for small businesses, running totally counter to all those pledges to help enterprise by “cutting red tape”.

Far from slicing red tape it extends the stuff by another mile.

The key change goes under the forbidding name of Real Time Information (RTI) reporting.

Under the new regime, employers will have to report Pay As You Earn (PAYE) information for each member of staff in “real time”.

It means that more than a million businesses, as well as charities, churches, and families who employ nannies or cleaners must immediately tell the taxman about any wage payments.

By a cruel accident of timing – or all too true to form for some - the change has been introduced just as 55,000 HMRC staff went on strike and when it admitted problems with its website and information systems.

Confident that HMRC computer systems will deal with this little hiccup? I thought not. 

PAYE has gone largely unreformed since its introduction in 1944 by the wartime chancellor Sir Kingsley Wood, who dropped dead on the day it was announced in the Commons. Many firms may now be wishing a similar fate had befallen his modern day successor.

Yesterday the HMRC admitted that the change may lead to more costs and problems than it has previously admitted, and that its official estimates about the impact on businesses “may not be accurate” after receiving feedback from employers.

The shake-up affects any changes made to staff payments, including Christmas bonuses, merit money for good work and extra hours earned to deal with an unexpected rise in workload. Instant reporting will enable the taxman to adjust tax codes more speedily and accelerate tax payments.

The British Chambers of Commerce has described the measures as a “massive change to the way that businesses operate across the UK”.

If HMRC wanted to give a boost to the “informal economy” and informal cash payments with no paper work, it could hardly have gone about it in a more effective manner.

The rationale for the shake-up is that today’s world of work has changed profoundly since the 1940s and workers now rarely stay with the same employer for life. Today, people move jobs much more frequently and HMRC has problems keeping up with what they earn. But how novel are Christmas bonus payments?

So complicated has the coding become that around 1.4 million people were sent tax demands totalling £3.8 billion in 2010/11 that resulted from problems with the PAYE system.

Small businesses have a six month grace period in which they can report once a month. But they will be required to adopt the new rules and computer software before complying fully in October.

HMRC claims firms will save £300 million a year in administration costs. But this is not the expectation of thousands of employers who need to invest in new payroll software or update their current systems.

This may be straightforward enough for a big company, but it is a costly burden on a small business at a difficult economic time. Moreover, a survey last week suggested that one in five such companies is unprepared for the change and, in some cases, unaware it is even happening. They risk fines for incorrect or late returns.

It is worth recalling – or perhaps not worth much at all – Prime Minister David Cameron’s promise to “cut back on excessive rules” to help “unleash our small businesses”.

Unfortunately, HMRC and the Treasury seem to be working hand in glove to speed up revenue collection, despite the hassle and expense to business.

Mr Cameron should have learnt a lesson from the early years of the Thatcher administration. I remember then Chancellor Geoffrey Howe telling me of the constant battles he had to keep the Inland Revenue at bay with unrelenting demands for more powers and changes to the collection system. Had he not staunched the flow, there would have been little by way of economic recovery otherwise. He had the impression that under the previous administration the Revenue could demand more or less what it liked with little restraint exercised by Westminster.

This is exactly the red tape that snarls up business, discourages employment and slows recovery. The least the administration can do is to extend the compliance period – or exempt SMEs altogether from this new edict.