Tax chaos looms

January is invariably a harsh month in the northern temperate zone. Not only do we usually experience our coldest weather with some of the shortest days, but here in the UK it is the last month in which you can file your tax return for the previous tax year. Having winced at the cost of Christmas and tightened your belt so that you can just afford to pay that off, you then have to find more money to pay the taxman.

It also reminds me, every year, how absurdly inefficient and tax-wasteful the process remains.

Twenty years ago, it was reasonable that many businesses still ran physical accounts based on written ledgers, and completed their tax forms in pen and ink. Somehow we have ended up with a system which is either far more expensive, or which is ludicrously and needlessly inefficient. And if you’re really unlucky, yours will be both.

Tired of paying hefty annual fees for accounting software which didn’t work the way that I wanted it to, I built my own system using FileMaker Pro. It now generates our invoices, and produces quarterly tax (VAT) returns with supreme simplicity. But it cannot link into our online income tax filing system because the tax man won’t permit that.

So, to prepare our annual accounts for tax purposes, I export all the year’s records in Excel format, and import those into Numbers, where I generate the annual summary figures. Those then have to be entered into Acrobat PDF forms which continue to pretend that I’m going to print them out. I then have to collate figures for other forms of income and allowances from a sheaf of papers – all of which are now printed from computer records – and finally submit through an intermediary to the online tax filing system.

This annual dance through the least-integrated financial information system comes at significant cost. Many businesses find the whole thing so complex and laborious that they pay accountants to do it for them. The cost of those accountants is, of course, chargeable against tax, so not only does this divert some of the hard-won income to pay for services which should be unnecessary, but it reduces the amount of tax paid. The system is actually losing tax income for the government as a result.

The UK government has now come up with an even better scheme. Instead of reforming that tax system to make it simpler so that more people can manage their own tax affairs, and making the tax return system more easily linked into computer accounting systems rather than pretend paper forms, it intends to require all businesses to file returns four times a year, instead of annually.

This will inevitably increase the cost of producing those returns, in fees paid to accountants, which will break some small businesses altogether, and reduce the total government income raised from taxation.

There is an even greater problem which does not appear to have crossed anyone’s mind, though.

Many of us involved in small businesses – and a lot in much larger ones too – don’t have a single source of income. When we file our annual tax returns, these cover all taxable income from all sources. At present, in our household, that includes some income from employment, some from pensions, some from share dividends, and various complex allowances.

Those other sources of income are currently summarised for tax purposes each year. So included in the tax forms that I have just completed are figures for the annual income from each of those sources.

Employers, pension providers, and everyone else involved in the tax system are currently geared up to produce those statements each year.

Changing the requirements for businesses, including the self-employed and those in partnerships, thus requires everyone to change. How can I possibly work out my tax liability on just a small proportion of my total income every three months, when most of my income is only assessed every year? You cannot run part of the income tax system on a quarterly basis, and the rest of it on an annual basis.

No one seems to have spotted this glaring problem, of course, because no politician appears able to recognise businesses with less than fifty employees and annual turnovers below the millions. Perhaps, like everything else the current UK government is touching, it is all going to end up as an unholy and unworkable mess. Only this time, they cannot blame anyone else for their own mistakes.