Welcome to today’s session of the Business and Trade Committee as we commence our inquiry into small business. Thank you very much indeed for joining us. Alice Jeffries, I am going to start with you, if I may. As we have reviewed the evidence in front of us, it looks like we now have widespread VAT fraud that allows bad actors to undercut good businesses on the high street. We have much smaller discounts on business rates than were enjoyed by many retail and hospitality businesses two or three years ago. We have a corporation tax system that, frankly, looks almost voluntary for many small businesses. From your point of view, do you think we have a tax system for small businesses that is best for growth?

There is a simple answer on that, which is no, but not necessarily for the reasons that you just outlined. Yes, we have a problem with some VAT fraud on high streets. The evidence that you heard in this Committee from previous specialists in, for example, the beauty industry, is that it is not just fraud. There are also totally legitimate structures you can use, such as a rent-a-chair system in a hairdressers, that would reduce your VAT and make you more competitive. We need to think about why businesses might choose those routes and whether that is because they are scared of the level of admin they will have to do when they engage with HMRC for the first time. For a lot of them, that is something they are not prepared or educated for. They do not get the help that they need from HMRC when they do engage. We know from HMRC’s service levels that that is the case.

We are going to come on to the service standards of HMRC shortly. Focus your energies for a moment on the structure of business tax that we have. Is it optimised for growth?

Again, no, for a few different reasons. One is cliff edges. We know that the VAT registration threshold creates a cliff edge where people simply choose not to get registered and go into that system. They fear the admin burden, as I say. They fear the cost and how that will pass through into prices to their customers, and that they will make themselves uncompetitive. The same happens in the business rates system. As you say, reliefs have been slashed, but also there is a cliff edge where you pass over a certain threshold of rateable value. That is the amount you are paying to rent the space that you are using for your business. You suddenly have to pay tax on all of that rateable value, when you had to pay nothing before. That can discourage small businesses from expanding into better-quality premises or investing in their premises. It can discourage them from growing to new sites and moving from one site to two, because they lose the reliefs at that point as well. It is just not good for very small businesses looking to get bigger. The same is true with PAYE. We now have an employment allowance that has gone up last year, but at the same time NICs rates went up. You want to keep your PAYE bill down by hiring fewer people so you fit below that higher employment allowance, rather than having to pay 15% on your PAYE bill above it. There are lots of reasons why.

There is a catalogue of problems. How damaging is that catalogue of problems for growth?

The thing that is really difficult about giving any kind of numbers or scope on this is how you check the counterfactual. Which of these businesses would have grown more if they could move to a bigger premises, hire an extra person or afford to earn more turnover before they hit the VAT threshold, for example? Is that the solution you want? Do you want all businesses to be within the VAT threshold so that there is no disincentive for them to grow at any point? Because we have not tested any of these outcomes yet—we have always, or at least for long periods, had these different cliff edges in the system—it is very hard.

Why did you say at the top of your answers that the structure we have is bad for growth?

We can see it in specific bits. We can see it in the number of businesses that are not registered for VAT that earn amounts just below the threshold. We actually saw, when it went up from £85,000 to £90,000, the businesses that shifted just a few thousand up so they could earn a little more. You can see in that behaviour that they are using what they can. You could reasonably imagine that those businesses would have the potential to grow even bigger.

How clear are the alternatives and how much consensus is there around alternatives among your members at the CBI?

In some areas there is more consensus than others. On business rates, for example, we think that we have an answer to that problem about growth, which is moving from a slab system, where you hit the cliff edge and everything gets taxed, to a slice system like you have in income tax. The first £15,000 or £10,000 of rateable value is 0% and then you go into a higher rate above that level. That is how most taxes work. It is how people think most taxes work. If you are using more of an asset and you are able to pay more, you should pay a bit more, but you should not pay a whole slab. We produced a report on that a couple of years ago that had full member support and consensus. It works for small businesses. It works for larger businesses with disparate estates. If you are a Tesco, you might have been consolidating your estate into bigger shops, for example, but this will keep you on the high street and in the Tesco Expresses.

What about on VAT reform?

There is much less consensus. As you can imagine, there are three categories of business there. There are the people—and we will not talk about them—who are so big that their whole supply chain is VAT-registered, so this does not bother them at all. Then there are the people who are around the VAT threshold. That is businesses that are over that might say, “You need to raise the threshold so that I am out of the system”, or, “You need to drop the threshold so that the people I am competing with are in the system”, but you will not get any consensus from the businesses about what the right approach is. Anyone who is currently under the threshold is much more likely to say, “Put it up, because I could earn more and I would not have to worry about it”.

Regardless, none the less, you think that the way that system operates at the moment is not good for growth.

No.

Okay. Alison, what is your view on whether the business tax system we have for small business is good for growth or could be improved?

I would agree with Alice overall. I do not think that it is good for growth. I would agree with a lot of the points she made, particularly on the VAT system. One thing I would really like to add to that is that one of the barriers to growth, if you like, is around a lack of consistency and certainty. That is the message that we get frequently from all sizes of business when we talk about what they want out of a tax system. It is understanding what they need to do for the medium term and not having changes sprung on them all the time.

Jonathan, you are the director general of customer strategy and tax design at HMRC. We have just heard some pretty compelling evidence that the tax system that we have at the moment is not great for growth when it comes to small business. Do you think that the tax design that we have at the moment for small business is good for growth, or could it be improved?

From our perspective, we are here to administer the tax system as it is. We do advise Ministers. We are aware, for example on the VAT threshold, that there are competing views. I was looking back at some of the evidence around hair and beauty. Partly the fact that we have a relatively high threshold compared to other countries—we have, I think, the highest in the G7 and joint highest in the OECD—means that, for example, the rent-a-chair model can be sometimes favourable to people. If there was a lower threshold, that would not necessarily be the case. Again, there are different views on that and on the question of where you put the threshold. As Alice said, other businesses would say, “It needs to be higher so I have room to grow before I hit that threshold”. There are arguments on both sides around, say, the VAT threshold. I can understand businesses thinking about the employment allowance. Where the employment allowance works is in that slice system. You do not pay employer NICs on the full element of that allowance when you go above it. It is only on the marginal increase, so there are already some elements in there that address some of the concerns we have seen in other taxes where you have slab and slice. This is an area where Ministers keep the tax system under review. Growth has been an element that this Government have set out, in terms of one of their objectives for the tax system.

Happily, we will have Ministers in front of us in due course to answer some of the questions about the judgments that they make. In terms of the advice that they receive, is it your view that there are different designs for the VAT system that would be better for UK economic growth?

These are all trade-offs. You have heard arguments about whether the VAT threshold should be higher or lower. There are arguments on both sides of that. Sometimes people have put forward ideas of a taper system where, rather than going from no VAT to VAT on everything, you taper it in, but that has the cost of complexity. That would be a complex system, as you put the VAT taper in, that businesses will need to comply with. There are some trade-offs and issues that need to be addressed, but, ultimately, they will be decisions for Ministers.

In the analysis that your teams have done, have they produced options for VAT reform that would be better for economic growth?

You can see, as Alice has described, a bunching of businesses below the VAT threshold. That is some element of distortion. Whether that is genuine behaviour or reporting behaviour is a bit less clear. You can see that, if you moved that threshold up, you would have some effect, but potentially you would only move the bunching up. Of course, with the way the VAT system works, triggering that threshold has a bigger cash hit for you the higher it is. We have looked and seen that bunching, but it does not necessarily tell you what the best option is in terms of removing that bunching.

Are you saying to the Committee today that you do not have a clear cut option in HMRC that would give you a reform of the VAT system that would be better for economic growth than the one we have today?

There are options for reform but, at the end of the day, they would be a trade-off. We have not quantified exactly what they would do to economic growth, either from increasing or decreasing the VAT threshold.

What are the options for reform?

There are, broadly, three. You could increase the VAT threshold. You could reduce the VAT threshold. One interesting thing on the VAT threshold is the financial effect of triggering the VAT threshold, but also the compliance and administrative costs in doing that. That is something you could think about. Increasingly, we are seeing businesses using software. That might, for example, mean that the costs of compliance are perhaps less than they have been in the past, when there was a lot of manual processing involved. The third alternative that has been put forward is this idea of a taper. Rather than going straight to paying 20% VAT, or liability for 20% VAT on all your outputs, you might have something where the first few thousand pounds is a lower level than 20%. The problem with that is complexity and understanding. As Alison said, part of the challenge here is having a system that businesses understand. If they make decisions to increase sales or invest, they understand how that will affect their tax liability.

There is a range of options for reform. When Dan Tomlinson asks you, a bit later on today, which of those are better for economic growth, you cannot say, “Well, Minister, it is A rather than B or C”.

Those would be trade-offs for Ministers. Different people will have different views about them. Yes, there are choices to be made there and different people will weight them in different ways.

Just in terms of the raw, hard-edged economic modelling, you do not have such modelling that tells you that one option might be better than another for GDP growth.

No, and you will hear different views, again weighting those different elements of whether a higher threshold allows businesses to grow more but they hit that threshold, or a lower threshold means that more businesses get over that and are therefore no longer constrained by the threshold for their growth. Those are the trade-offs you face.

Thank you for that. I take your point about counterfactuals, but there are lots of countries in the world that have VAT, which are obviously different from the UK, but there is a set of petri dishes that are different but relevant. For Alice or Alison, whoever would like to answer this, there is this whole point about data and modelling. Here we are. We are doing our best to try to understand, as is the country at the moment, who has the best data and the best modelling. They do not have to be right, but point us in some directions, so that academic or that academic. What are the best papers and the best bits of work?

I really want to point to Jonathan on my right, because HMRC are the people who have the data about individual taxpayers. I will say on his behalf—and I am sure he has other views on this—that that data will not be complete for a number of reasons. With VAT in particular, he already highlighted the gap around who is bunching underneath it. You do not know whether that bunching is because the businesses—and we would expect from our membership that this is true for the vast majority—are making a choice. They are getting close to the threshold and just saying, “Okay, I am not going to do any more work this year”. If you have ever tried to hire a tradesperson in January or February, you might find that it is much tougher than the rest of the year. Alternatively, they might just be failing to report that income to HMRC. Those have different outcomes in terms of what the modelling looks like and the growth, because there might be a large grey economy, which might shrink if you were to change the VAT thresholds, or those people might bring their income, all of that grey income, into the legitimate economy, and you do not know. You might have a large group of people who, the moment that you change the threshold and they do not have to worry about this any more, whichever way you do that, say, “Okay, I am not going to stop working in January”.

I get that, but you are more expert than we are. We are looking for your advice as to where to go to have informed opinions and informed information that we can then draw opinions from. People have to make decisions on this and we need help on that. Tell us where to look, please. There must be somebody who has some good data and modelling on this.

One thing that HMRC has done in the last few years, which is really helpful, is to give more of that data to academics. I do not know off the top of my head who you could look at for VAT in particular, but HMRC is putting a lot of the data that it has available to it into anonymised data banks, so that you can look at particular categories of taxpayer in more detail and do that analysis. The thing that leaps to my mind, if you were interested in high-net-worth individuals, for example, is that there is a team at Warwick University under Arun Advani that has done a lot of work on them. There will be other specialists who have looked at other areas, depending on what data is available. It depends on who you are talking to and what you want to talk about.

Alison, do you have any views on how to resolve this in an informed way?

The data has to come originally from HMRC, because they are the people who get it directly at source. It is then making that available in as open a way as possible to other people. We see, even with the tax gap data that we get, that it is not necessarily granular enough to draw a lot of interpretations from it. The more detail that HMRC can draw out and make public, the easier it is to have an informed conversation about things.

Would you be willing to write us a list as to what you would like to see?

Yes.

Jonathan, would that be something that HMRC would be willing to do?

We make data available to researchers. Like Alice, I do not know off the top of my head any particular research that has been done on the VAT threshold using our data, but it is available. You would think that people such as the Institute for Fiscal Studies would look at these sorts of issues. I am certain, actually, that there are many tax commentators out there who probably also have views on what should happen with that threshold. I do not want to point to particular individuals, but the Institute for Fiscal Studies is often authoritative in its research in many areas.

One thing that we can offer at the CBI that other groups may not be able to is more on the administration side. We know that HMRC tries to do estimates of what it costs a business to design a new system and implement it, but a lot of what businesses do is actually to collect data and tax for HMRC, and that is the main cost to them. If you were talking about PAYE or VAT systems, for example, actually most of being in a VAT system is collecting data and tax from your customers to give to HMRC. Quite often HMRC uses a model that we think underestimates the costs of that and, if you had to use a third-party adviser, for example, does not properly model that. We can get more information from our members because they are more willing to talk to us about that than they may be to talk to HMRC.

Alice, sticking with you for a second, the Government have announced changes to business rates recently. What is the CBI’s view on those changes announced, and does the CBI think that those changes will make the high streets more advantageous against online competitors?

We are really pleased to see this Government engaging with the idea that the current business rate system does not work and needs fundamental reform, but the proposals that we have heard so far to us do not look like fundamental reform. They do not work for businesses that happen to be in large sites. We have single manufacturing companies that happen to be on one large, expensive site and they will now be paying a higher rate under this change to the £500,000 rateable value threshold that has been introduced. We also do not think that they address the underlying problem. I would agree with previous evidence that has been given to this Committee that business rates are not the reason the high street is in trouble, or at least they are not the whole reason. There is much more going on there in terms of shopper access, competition and the shift to online shopping for convenience and price. There are other things that you could do to solve that problem. Having said that, business rates blocks businesses investing and growing, and we have talked a bit about why a slice system would work better for that, particularly for small businesses. We have this example that comes up over and over again of pubs across the street from each other, one of which has taken the time to invest to make it a nice space to be in and spent a lot of money on redecorating and putting in new pumps. It will then get a revaluation that puts its business rates bill up compared to the guys across the road whose pub is falling apart. You do not want to have those blockers in the system that discourage investment, especially when we are trying to get to net zero. Property and buildings is a big part of net zero targets. You need investment in basic things, such as insulation and new windows and roofs.

On that, would you support the idea of moving away from a business rates system that talks about property value and towards a land-value-based system, for example?

That is one option, but we think our slice system solves a lot of the issues here. You do not have to move to an entirely new model. It would work to be able to look at slices. It would mean that, as we have already said, if you are a smaller business looking to grow or a business with multiple sites, you would be better off. The vast majority of our members who have been involved in that consultation think that they would be better off under that system.

As a supplementary, do any of you think that the small business rates relief threshold should be increased?

We think that you should get rid of small business rates relief. We do not think that you need it if you have a slice system, because you have a 0% rate that essentially gives most small businesses no tax bill in the first place. That is our answer. On a lot of the smaller reliefs, if you had this system it would also be simpler, because your zero rate would replace many of the smaller, more complex reliefs. It is easier for businesses to understand: “My rateable value is £20,000; £10,000 of that is free of tax”.

What specific barriers do small businesses face when trying to comply with the tax system and how can we address them, whether it be local support or simplification? I will start with Jonathan and then go across.

There are a number of things we can do. For some of our regimes, we already have quite a simplified system. If you are self-employed, you only have to report basically two numbers: your cash income and your cash expenditure. We already have some simplified systems in for individuals. The key elements we can then layer on top are twofold. One is good guidance and support. Often, when people are setting up businesses, they will never have had to deal with the tax system before. How can we provide guidance and support for them to make certain they understand how to comply with their tax obligations? The other aspect that is important is where we can either offer digital services or encourage the use of digital services. We will probably come on to Making Tax Digital. Part of the aim there is to encourage people to start using accounting software from almost day one of your business. We want you to be using that software. That software is good in terms of tax compliance because, rather than just keeping receipts in the proverbial shoebox, you are keeping information on your income and expenditure more regularly. That will help you comply with your tax obligations. We found, when we introduced Making Tax Digital for VAT, that businesses also reported that it gave them a better understanding of their business. For us, it is simplification where we can. As I said, for the self-employed, it can be relatively simple if you have simple tax affairs. It is guidance and support to help people get things right. Then it is digital tools, whether that is tools provided by HMRC or third-party software, where we are seeing real growth, that helps people get their tax affairs right but also helps them manage their business.

I have a follow-up question in terms of digital literacy. There are high levels of digital illiteracy that need to be addressed. Does HMRC have any plans to tackle that, any programmes that it is willing to roll out or any localised support it wants to give out to certain areas that particularly are struggling with complying with tax?

We generally see quite high willingness of individuals to use digital services. If we take the population as a whole, you would say that 80% of people are willing to try to use digital services, but often they need reassurance to use them. Some of that is about design. If I have filed my tax return, how do I know that it has been filed? We can provide reassurance through that. We have been trialling efforts where we use our call centre staff not just to answer immediate questions but to coach people to use digital services in the future: “You phoned up this time, but would you like us to help you set up a digital account for the future?” We are moving in that direction, but actually we are a long way from reaching the limits of digitalisation, so there is a long way to go before we get to the digitally excluded, but we are thinking about how we help and support those. Of course, there will always be a need for phones, for example, for people who are digitally excluded or for other reasons need extra support. Perhaps they have a very complicated query. We know that we will still need to offer phones for those, but we think that there is a lot further we can go with our digital journey.

We know from looking at the stats for Making Tax Digital that there is a high percentage of small businesses that are simply not using the new software and are still having to ring up. How do you see that being addressed? You are saying that there is still going to be a phone system, but it does not address those people who struggle with disabilities or, as I said, digital literacy. How do we get access? The problem is that there are not enough people complying with this and small businesses are costing the economy large lumps of money that could be used back into our economy, but they are not.

We are on a journey, to use a term. We have introduced Making Tax Digital for VAT, so that is how businesses are interacting with us through software for VAT. That is working very well. I am certain that there are some groups where we have had to make exceptions. There are around 20,000 businesses that said that they were digitally excluded and needed to be given an alternative service. Where that has happened, I think that we have done that. Making Tax Digital for Income Tax is now being rolled out over three years. We have a phased introduction of that. Again, if you are digitally excluded, there will be an opportunity for people to opt out of that. They will be able to get support from HMRC, either through our digital channels if they can use them or by phone if they need to. We need to go down that route of gradual improvements in our digital service. Also, over time, we are finding new ways of delivering our digital service. One area—it is primarily aimed at individuals rather than businesses—is our app on phones. That is getting very high levels of take up and customer satisfaction. It is about improving our digital offering, but also rolling it out gradually over time and having good routes for people who are digitally excluded.

Alice and Alison, can I get you to go to the original question? What specific barriers are there to complying with tax and how can we simplify it?

We would agree with HMRC that digitisation is really the way to go. Doing everything on paper increases the likelihood of errors and not having good records. It takes a lot more time to do your administration if you are doing it that way. We have seen evidence that you could have productivity gains of just under 12% for businesses that move on to a digital system. There is also a first adopter barrier there. Once you have moved on to a system for tax, you might then find it easier to bring in more sophisticated digital systems for other parts of your business. That initial fear of implementation, training and how you work everything through in your business has potentially been breached, so there are wider benefits, potentially, as well of digital tax software. I do not think that Jonathan is being deliberately disingenuous, but it is a bit of an oversimplification to say that you simply put in your income and expenses. You have to know which expenses are allowable. They are not the same ones necessarily for your tax as for your accounts. You need to understand why there is a difference. You need to report it all correctly. Even if you use an adviser and have the ability to do that, you are still personally liable if you get it wrong. For a lot of people, if you are a very small business in particular—a one-man band or one, two or three people—the idea of getting that wrong can be really stressful. The more guidance and support you get from HMRC, the better. We know that HMRC’s call answer rate has been improving, but just taking all the calls does not mean that you are actually answering all the queries. The fact that the complaints rate is up about 10% to the adjudicator in the last year, from about 950 to, I think, just over 1,040, is a sign that there are still problems there and people are not accessing the support they need at the moment from HMRC. When we come to Making Tax Digital, particularly for income tax, there are a couple of things there. The first is that, if you are a big enough business that you are already in Making Tax Digital for VAT, you are doing quarterly reporting and it is unclear why you should have to use a different system and a different set of software to do a different type of quarterly reporting for your income tax. One big simplification that we would like to see is those two systems working together so that you can do one set of reporting that covers both. That would be a big step for HMRC to do, but it would be really positive for those businesses that are already over the threshold, or getting close and might want to voluntarily register for VAT, because you can do that from any level. The other is that quarterly reporting for the people who are not within the VAT system is going be a very new thing. When we talk about a phased introduction, it is businesses that have £50,000 worth of income from next April, then £30,000 the year after and then, potentially, £20,000 the year after that. That is a very fast turnaround to be bringing so many people into a quarterly reporting system when we do not even have the software out there yet for them to be using. We only had a potential list published a couple of weeks ago. Even if you are the most informed, prepared small business in the world, your advisers have let you know that this is coming and you are looking at these software options, you have not implemented it yet. You now basically have about six months to get everything ready to go to be able to report from April next year. There will be a lot of businesses that are not in that place. They are not ready. We were originally calling for HMRC to drop quarterly reporting and we understand that that is not going to happen now. We are now calling for a much longer tail in terms of the soft landing. We need HMRC to be willing to work with businesses over the next few years to make sure the system works. We would really like to see that introduction to smaller businesses pushed out so we have time to get the group of over £50,000 right and get the system working. There will be bits where we just do not know that there are problems until it has been implemented for a bit of time. Something we really need to be doing is getting Making Tax Digital for Income Tax right for one group before we extend it to anyone else.

Jonathan, picking up on something Alice has said on customer service, this Committee has heard, and I hear when I go to small businesses around my constituency, that they often have a nightmare dealing with HMRC. These are businesses that are trying to do the right thing but cannot get through to someone or, when they do, do not get the answers they need. They end up submitting on a wing and a prayer that they have done the right thing. First, do you think that we need to fix your customer service? Secondly, if you do, what are you doing to fix it? Thirdly, when will you be back here to tell us that those improvements have been made?

We are on a path to improving our customer service. A key metric we use is how many times people phone us and want to speak to an adviser, and how many of those calls get through. If I was here 12 or 15 months ago, we would be talking about numbers about 50%, so only half of people getting through. Over the last year or so, we have made substantial improvements. Our target is for 85%. That is what we are funded now to do. We are pretty close to those levels at the moment. I think that we are about 83% in the latest area. To give you a sense of what that translates to, that means that the average wait time is about 13 minutes. Around half of calls are answered in under 10 minutes. That is where we are now. Obviously, that is average across all customers, all different customer queries they might have and all time periods. We know that, at certain times, there is still pressure on those. We think that the basic level is getting there, so I am hoping that we will start to see some of those improvements mean fewer complaints. Many of our complaints, as Alice was talking about, were about timeliness, so we are hoping that we are getting better there. It then allows us to focus on other issues. For example, are we helping customers in the way they want? Are we able to answer their queries? We have also seen, for example, the length of time we are on the phone with somebody go up. We need to understand whether that is because we are now dealing with more complex queries or whether there are some other problems that mean that we are taking longer because we are struggling to deal with a particular query. I am hoping that our basic service standards are improving. From that, that allows us to then address other issues. If we are not answering the phones in the way people want, that is the cornerstone of what we need to build on.

When can we expect an understanding of the quality of the conversation and that being where it needs to be?

Now that we are pretty much back to where we are, we can start to do that work. We collect customer satisfaction scores, so that is a key element. We have a feedback form, so we allow people to give us feedback. It is that analysis that then allows us to understand what is going on with that query. Sometimes there are challenges. We know, for example, that one reason why people phone us is that they would like their repayment if there is a repayment due. We are able to make most of our repayments very quickly, but sometimes there are extra checks that need to be made for security reasons, such as counter-fraud checks and those sorts of things. Now we have got back to that level, we will then be able to look at the evidence underpinning that about whether we are actually meeting people’s needs when they get through on the phones.

We will follow up on that. To follow up on my colleague Sonia’s points on digital services, one thing I know that the Government are pushing is AI for small businesses and e-invoicing potentially as part of that. My understanding is that HMRC is looking at e-invoicing and whether that should be mandated. My view is that it will not have the benefits to SME productivity and drive down late payments unless it is. Do you agree with that?

That is the direction we are moving in, towards thinking about mandation, but there are a lot of different flavours of that mandation. You are right: the benefits come because it is not just you issuing the invoice but also the person receiving the invoice. Sometimes the benefits are to the person on the other end of the transaction, so therefore there is a bit of a risk that, if you left it purely voluntary, you would not get the take-up you need. I very much agree with that.

The flavour you would go for would be mandated.

That is certainly the direction of travel. Then the question is whether we get copies of every invoice or whether we go for a distributed model, where we allow the invoice to be held by the business or by the software provider, and then we almost go out to check the invoices rather than them being sent to us. There are a lot of elements in this. There is also a lot of subtlety about how you might introduce it. In many ways, the tax bit is probably the bit that comes last. You probably introduce the e-invoicing and get businesses doing it first, and then think about the tax consequences or bring that into the tax system a little bit later. There are lots of issues here about how we work with businesses on that. We also recognise that, even if it is going to be a benefit in the long term, as Alice will probably recognise, there is also an upfront cost of making that change and changing your processes. We need to be mindful of that as well. We think that there are a lot of advantages, both for businesses and for the tax system, in e-invoicing, but it needs to be approached in quite a sensitive and thoughtful way, learning international lessons as well.

Given what is at stake in these phone calls, which is generally that people owe the taxpayer money or need money back, why is the target 85% and not 100%?

That is the agreement we have reached with the Treasury about where we are. That is the level we are funded to.

You are not funded to answer 100% of phone calls.

No. Every extra per cent of calls you want to deal with becomes more challenging, because you have to deal with calls at any particular point during the working day. We have peaks through the year that are problematic, but that is where our funding level allows us to get to.

Help us understand that then. Per year, if you took last year’s volumes, how many phone calls would go unanswered if there were 15% of calls that did not get picked up?

Off the top of my head, we are talking maybe 3 million or 4 million calls, potentially. I am just trying to think through how the numbers flow through our system, because they are triaged and people are allowed to work out what they want to do and whether they want to wait for somebody or not. Of those people who indicate, it is probably 3 million to 4 million calls that go unanswered.

Three million to 4 million calls go unanswered?

Yes. That is the sort of level we are talking about.

Good grief!

Can I add to that? One of the ways that HMRC increased its call target was to move the people who were working on responding to written correspondence into the call centres at the highest point of issue in the year, which I believe is around January time when the self-assessments come in. There was then a backlog of written correspondence that needed dealing with that was all delayed, so it is not a long-term solution.

It is not often that we are lost for words on this Committee, but 3 million to 4 million calls unanswered is quite surprising evidence.

I would have to confirm that that is the right number, but that is the ballpark.

Sure. Even if it is a rough estimate, it is still a horrifically high estimate. Mr Maynard, this may explain the answer to your question.

I am going to ask about the tax gap, which is the gap between what HMRC should collect and what tax it actually collects. The small business tax gap has rocketed. I am going to read something out that says that 40% of corporation tax due from small business was not paid in 2023-24. Small business was responsible for a tax gap of £28 billion. If the small business tax gap was the same as the mid-sized business tax gap, i.e. much lower, HMRC would have collected an additional £15 billion every year. When we talk about £22 billion tax holes and things like that, this is really chunky. It has really gone up in the last 10 years. Why has it gone up so much in the last 10 years and what are we doing about that?

Part of the reason for it going up is us better understanding the problem. We have better measurement, but I would not say that better measurement is the whole issue. We are seeing underlying worsening of the tax gap for small businesses. Some of that is a growth in the number of small businesses. We have seen a large increase in the number of corporation-tax-registered small businesses, so some of it is just literally changes in the population. What causes it is basically three things. One is businesses under-reporting income or over-reporting expenses. For those who are incorporated, it is people sometimes withdrawing money from the company without declaring it as a dividend. It is a bit more complicated than that, but those are the challenges. Part of the reason, for example, for increasing Making Tax Digital for income tax is that, for the self-employed part of that population, we find that poor record keeping is a big contributor. If people are self-employed, do they keep their receipts in a shoebox? Not all the receipts make it into the shoebox. That is a problem. We want improved business accounting or reporting and record keeping. That is the direction of travel there to reduce that risk of people missing income or getting their expenses wrong.

Thinking through sticks, carrots and nudges, how active are you on the nudges? There are ways that we can tip people into doing sensible things. Is that something you are very active on?

Yes, it is. At a much more detailed level, we will go through our processes one by one and look at where there are problems. One of our issues we found with small businesses was claiming a national insurance relief they were not eligible for. Instead of just saying, “Are you eligible for this relief?”, we put some questions in the electronic form that allowed us to make certain we got people through to the right answer. We are very keen to do that. We are also thinking about how we use third-party data to better understand what people are telling us. At the moment, we have access, for example, to merchant acquirer data, so that is credit card data. We can look at those sorts of things. Increasingly, we would like to use that to nudge people and say, “We have some evidence here. Are you certain that that is the right number?” Part of using software is that we can actually build those nudges in in real time. You are entering something into the system. We can nudge you and say, “That does not appear right”, or, “This does not appear consistent with other information. Do you want to check this answer before you submit it?” We are very keen to go down that route. One challenge with the very large populations we are talking about is traditional compliance techniques of visits from tax inspectors. Yes, we will do them, but they will never cover a very substantial proportion of the population. We need to use exactly those techniques of nudging, prompting and building good processes into the system. At the moment, with self-assessment, you can have 21 or 22-month lags in the system and that creates real problems for individuals. That is why we are encouraging the use of software and those sorts of things, because better record keeping will help with that tax compliance. I hope that that gives you a sense of where we are trying to get to.

Move fast, I think, given that ramp.

There is a trade-off here, as we have heard from Alice. We want to move to digital, but there is a question of the pace of doing that. We would like to go there quickly from a compliance point of view, but we know from businesses’ point of view that using software is a big change for them, so we need to balance those.

But £15 billion is a lot of money to leave on the table.

It is.

This is a question to each of you. Perhaps I will start with Alison Kerrey. If the Government could make just one change to the tax system for the benefit of small businesses, what would it be and how would it help SMEs?

What is the thing that would make the biggest change that I can see? It is possibly too much to say, “Stop tinkering with the tax system and give people the certainty”. If Government are thinking of making a change, they should think about that change from an end-user point of view, so small business, large business, whatever size, and think about, “How is this going to land with that business? What problems is it going to create for them? Genuinely, what costs will there be?” Improve the cost model and the assessment of it. Think about what that impact is and then try to design a change. It cannot take away difficulty for businesses, but you can minimise that and make it more likely that benefits are realised. Too often we see costs underestimated and businesses unable to get hold of the benefits, particularly around digital if they are not particularly digitally aware at the start. They are the ones you see incurring more cost. They are the ones you then see not realising the benefits or taking longer to realise the benefits. Really thinking it through would be what I would ask for.

Can I have two, so one for small businesses and one for micro? For small businesses, we know that HMRC is looking at fixing its corporation tax systems. Given that that is the biggest bit of the small business tax gap, that is what we want to see it moving forwards really fast.

What change do you want to see to that?

We want the system to be better built to bring companies into it, so, linking into pain points, better software that is cheap and available to them without them having to spend a lot of time doing training, and that links up with their existing software on VAT or income tax as it is coming in. We would like to see those systems all linked together. We know that redesigning the corporation tax systems is a big part of what is coming. That is something we are really looking forward to working with HMRC on.

On that, would your intention be that most small, rather than micro, businesses could just use an accountant once a year and the rest of the time they will be able to manage their affairs themselves using the software?

It will not necessarily be once a year. You might have quarterly reporting and you have to get that right, but it should be something that is easy to do day to day. You might have seen adverts from some of the software providers where you can take a picture of your paper invoices and that all feeds through into a system that connects into HMRC. That is how some of the VAT systems already work. We would like to see income tax and corporation tax linked into that so it all works. As a business, you only have to do one set of things to achieve the outcomes you need and get your tax right. The microbusiness piece is that there were about 400,000 penalty notices issued to people for late filing over the four-year period between 2018 and 2022 for people who have no tax to pay. They were issued a £100 penalty when they had no tax to pay. HMRC is addressing this through Making Tax Digital for income tax for people who are coming into that regime, so that is people with businesses worth £50,000 or more. The lowest-income people—the people who cannot afford to pay that money—are still going to be subject to that £100 penalty. Sometimes we have seen those people. They might have mental illness, very low incomes or difficult circumstances in terms of them receiving the paper bills, and that debt can then mount. It is all coming from a situation where they do not owe the tax authority anything. For that group of people who might have a side hustle or a part-time job or be on a zero-hours contract—they are earning a little bit of money, but not enough to pay tax—we want those penalties abolished.

How do you make sure that you are getting the right people and the right people are paying tax? Forget the penalty; we should not be sending those notices.

It is simply for this group who do not have tax to pay. You can definitely send them a letter saying, “You did not file your tax return on time”, but you do not need to then charge them £100 for the data that you are receiving late, essentially.

I fear that my advice on the tax system is probably best directed to the Chancellor, if I can be slightly unhelpful in that regard. The key thing I would say is that our direction of travel for administration is very much in the direction Alice has suggested. We would like tax almost to be built into many of the systems people already use. If I look at PAYE—I am certain that, if there are payroll providers around, they would say that it is probably a bit more complicated than this—payroll is there and PAYE, the tax, almost becomes a consequence of running the payroll system. We would like the accounting software that businesses are using in order to capture receipts to do a lot more of that heavy lifting for taxpayers, but I will not get into tax policy, as I said. That probably is best for the Chancellor.

That brings us to the end of our time. Thank you very much indeed for your evidence today. That has been slightly horrifying, but also slightly illuminating. That concludes this panel.