Tax red tape costs UK businesses £15bn a year

Britain’s growth is being buried under a mountain of tax paperwork

Businesses spend more than £15 billion a year complying with Britain’s tax system — before paying a penny of tax. That is money which could be invested in jobs, training, technology and growth. Instead, firms are paying accountants, buying software and losing working hours to an increasingly complicated system.

THE £15BN QUESTION

What could the UK economy achieve if businesses weren’t drowning in £15bn of tax compliance costs?

HMRC now estimates that UK businesses spend over £15bn a year simply complying with the tax system. That’s not money we’re paying in tax, just complying with it. At the same time, the cost to the Treasury of administering the system has risen 15% in real terms since 2019–20, according to the NAO.

This is a double drag because businesses lose time and money and the government loses efficiency. All in all, the economy loses growth as a result.  

The burden is rising further as sole traders and landlords are pulled into Making Tax Digital, and the cost and time involved in quarterly reporting. Knowing where your finances are at every quarter instead of once a year, has got to be good for business, but it costs time and money.

Tax compliance is now growth issue. Think about what the UK economy could achieve if businesses weren’t spending £15bn a year on tax admin.

Productivity boost

£15bn is a drop in the ocean in the scheme of things but it’s not a small amount to small and micro businesses. It’s equivalent to the annual output of the UK’s entire creative industries for instance and it’s the combined turnover of 50,000 microbusinesses. It’s also the cost of hiring 300,000 full‑time employees so there’s money that could take a quarter of our young people currently looking for work, off the unemployment list.

If freed up, that £15bn could be spent on new jobs, digital upgrades, training, exporting, product development or investment in plant and machinery; just some of the things that micro businesses can’t afford to do at the minute.

This is the kind of shift that moves national productivity numbers materially.

Higher survival rates

Tax compliance is one of the top five reasons microbusinesses close, because compliance costs hit the smallest firms hardest. The tax system was built for big businesses and doesn’t work for small ones. For firms that are sole traders or high street independent businesses even £1,000–£3,000 a year in tax admin is too much and can be the difference between survival and closure. Take that burden away and you immediately increase survival rates and strengthen local economies.

More dynamic labour market

The UK is stuck in a “low hire, low fire” cycle. Businesses aren’t expanding headcount, because costs are too high and tax compliance is part of that cost. Freeing up £15bn would allow firms to hire more entry‑level workers and play a part in reducing the number of young people struggling to find a way into the workforce. They could consider taking on apprentices and investing in training. If firms want to grow they need more people with the right skills.

More to invest

Complex tax rules discourage investment because businesses are very concerned about making mistakes. They struggle to struggle to understand the raft of complicated incentives and they avoid growth in case it triggers new tax obligations. As an example, some firms slow down expansion in case they reach the point they have to register for VAT. That puts all their growth potential at risk.

A simpler and more proportionate system that works for small and micro businesses would increase confidence to invest and reduce friction.

BDO the big business consultancy argues that tax simplification should be part of the growth agenda, not a bolt‑on.

Stronger growth

The mid‑market; those firms with turnover between £10m and £300m turnover is the hub of UK productivity and faces the heaviest compliance burden. Simplifying the system reduce corporation tax complexity, remove marginal rate distortions and improve cashflow planning. That would give firms the incentive to invest.

BDO has suggested a single 21% corporation tax rate to reduce uncertainty and compliance costs and boost investment and employment.

VAT system

The VAT threshold is one of the UK’s most damaging “cliff edges”. Businesses deliberately slow growth to avoid crossing it because they don’t want to get tied up in all the additional report and paperwork. The VAT system needs to be reformed to build in incentives to expand and take the brake off growth.

Investment

Entrepreneurs often see the tax system as a constraint, rather than an enabler. Reforming incentives like the Enterprise Investment Scheme (EIS) could support businesses that want to scale and prevent drop‑off between startup and growth stages. We need to keep companies in the UK and attract more capital if we want regional growth and innovation.

If UK businesses weren’t spending £15bn a year complying with tax rules, the economy could unlock higher productivity, stronger survival rates, jobs, innovation and investment.

Simplifying the tax system is one of the cheapest ways to boost UK growth bit it’s not easy. It has been tried before with a special Simplification Taskforce of top tax minds, and after years of ruminating that got nowhere. Ahead of the Budget, the message to the Chancellor is growth in every postcode starts with tax simplification.

Businesses spend more than £15 billion a year complying with the tax system — before paying a penny of tax. That money could fund jobs, training, technology and investment. Instead, it is being swallowed by paperwork, software, professional fees and lost working hours.