SMEs tax waste runs into billions of pounds

The average SME in the UK is set to waste £1589 during 2012 in unnecessary tax payments.

The biggest area for tax waste is where SMEs don’t incorporate their business, which accounts for a total of £4.2bn of tax wastage. With the prospect of a double dip recession looming, UK SMEs are preparing to battle increasingly tough trading conditions.

Despite this, it has been revealed in new research from unbiased.co.uk’s ‘Small Business Tax Action Report’ that SMEs are set this year to waste an enormous £7.15bn in unnecessary tax payments in 2012. This equates to average of just over £1500 for every one of the 4.5m SMEs that there are in the UK.

The annual Tax Action Report from unbiased.co.uk takes a look at the average amount of tax that we, as a nation, waste. This years edition, for the first time, includes a specific section that looks at the key areas of tax wastage among SMEs. The report examines the savings that SMEs could make simply by using their array of allowances better, as well as the tax credits and the tax efficient business support schemes that are also at their disposal.

The report also reveals that the no. 1 area for tax waste for SMEs is incorporation, which alone stands at over £4.2bn, followed by the failure to use self employed contractors, £2.05bn, and utilising their development and research relief, £373m.

The most significant of the SMEs tax wastage is being accumulated by partnerships and sole traders through the failure to incorporate their business by not turning it into a limited company or a limited liability partnership.

Currently, around 1.3m UK businesses could benefit from different savings on NI contributions and income tax breaks, all they have to do is change their legal status. The second highest area for tax wastage could also be addressed by companies if they made more use of self employed contractors.

Although there is some evidence of the so called disguised employees, who leave a company to become self employed yet continue to work practically full time for the same company, this is an illegal practice and should not be considered as an option by an SME, unless they are prepared for the consequences.