Independent report

Administrative Burdens Advisory Board (ABAB) 2024 annual report: Better tax for better business

Published 16 December 2024

Foreword

During a changeable political landscape this year, the Administrative Burdens Advisory Board (ABAB) has once again been listening to and supporting small businesses and their representative bodies in their dealings with HM Revenue and Customs (HMRC) and the tax system generally. I and my fellow ABAB members are committed to making a noticeable difference for small business by encouraging and supporting HMRC to make tax easier, quicker, and simpler for them.

We do this by highlighting to HMRC the concerns small businesses have around engaging with the tax system both technically and more importantly administratively. As HMRCs independent, expert small business adviser, ABAB is uniquely placed to hold these conversations and help policy makers and politicians to understand challenges faced.

Small and medium-sized enterprises (SMEs) have a substantial economic impact on the UK. SMEs employ millions of people, account for a large percentage of the total UK workforce and their collective turnover is into the trillions. With this huge economic contribution, it’s in everybody’s interests to reduce and remove the unnecessary regulatory and admin burdens which all too often hold back SMEs by creating additional costs and limiting opportunities to grow.

We learned more about these negative experiences in our ‘Tell ABAB’ survey this year, which saw a new record number of responses. I want to offer thanks to the over 10,000 respondents: a 35 per cent increase on responses received last year. Survey findings confirmed the barriers and problems faced by SMEs, and we are using these insights to drive our agendas and meetings with HMRC.

The high response rate gives us a strong mandate to negotiate change. We have been impressed with improvements already delivered by HMRC as a result of previous ABAB survey feedback. Examples include some HMRC written correspondence simplified to remove jargon and improve clarity. More is needed, and we are keen to see – and report back – further tangible evidence of where our steers have made a difference.

HMRC is under-resourced and operating on IT systems that are decades old. This means that sensible digital improvements, including the streamlining of information requested by HMRC, are being held up. Paper-based processes are still being introduced for new taxes and reporting requirements.

Taxes have to be collected, but this needs to be done in a way that imposes the least possible administrative burdens on businesses – especially smaller businesses who have the least resources to manage those burdens.

We do, however see a real opportunity for burden reduction and look forward to working with government (in our unique capacity) as a conduit between SMEs and policy makers, to achieve this.

We noted with interest the recent announcement by the Rt Hon Pat McFadden MP, Chancellor of the Duchy of Lancaster and Minister for Intergovernmental Relations concerning plans to make the state “more like a start up.” We support this ambition. Improved tech systems have a crucial role to play in tax administration.

Our agenda for 2025 is at the end of this report, and we would welcome your comments and input to help us with our work: please contact us.

Dame Teresa Graham DBE
Chair, Administrative Burdens Advisory Board

Introduction

The Administrative Burdens Advisory Board (always known as ‘ABAB’) offers constructive challenge and support to HMRC by championing the views and concerns of the small business community. ABAB Membership consists of a group of small and medium business operators and tax advisers; we cover a wide range of business sectors and pride ourselves on our relevant, current knowledge and our expertise and independence. We provide a valuable tax related connection between small business and government.

Our quarterly board meetings are attended by senior HMRC personnel. Our members also regularly comment on consultations and take-part in more detailed discussions, including at internal HMRC meetings and events. ABAB reports annually, as an independent body, to the Exchequer Secretary to the Treasury (XST) as the Minister with day-to-day responsibility for HMRC and the tax system.

Our primary goal is to ‘make a noticeable positive difference’ for small businesses, particularly in relation to the administrative burdens imposed by the tax system. We are not a statutory body; we exist by invitation of HMRC. Our approach is to operate as an independent and unpaid ‘critical friend’ to HMRC, offering constructive challenge and support.

We remain firmly committed to the goal of a simpler and easier tax system for small businesses. We think this offers a ‘win win’ situation for all involved: a simpler and easier tax system will not just save businesses administrative time and money; it will likewise save HMRC time and money as there will be fewer mistakes and difficulties to resolve. And it will help the tax revenues flow more smoothly into the Treasury’s coffers!

We aim to ‘make a noticeable positive difference’ by a focus on 3 priority areas:

• reducing administrative burdens to enable easier, more efficient and effective tax systems
• being an independent, critical friend to HMRC who can critique and offer guidance and advice
• close consultation with HMRC, which has overall responsibility for policy changes

This report covers our work from December 2023 to November 2024. In our report last year, we set priority areas for ABAB’s attention this year as:

• Making Tax Digital
• tax simplification
• customer experience
• basis period reform
• ‘Tell ABAB’ survey

The report will show how discussions have progressed this year. It will also provide a commentary around additional topics we have engaged with HMRC on during the last 12 months.

As structure for our report this year, we have used the 3 priority areas that the XST has set for HMRC to report against. These are:

1. modernising and reforming HMRC
2. improving day-to-day performance
3. closing the tax gap

Priority 1: Modernising and Reforming HMRC

1.1. Making Tax Digital for Income Tax Self Assessment (MTD for ITSA)

MTD for ITSA requires businesses and landlords with qualifying income to maintain digital records and update HMRC each quarter using compatible software.

We have taken a keen interest in the MTD programme since it was originally announced in 2015. We see digitalisation as holding great potential to improve the administration of the tax system, subject to our fundamental belief that change must be implemented in the right way and at the right pace. As we have said before, tax is not and should never be the only driver for change.

In our 2022 Annual Report we set out a number of concerns relating to the Income Tax Self Assessment side of MTD (MTD ITSA) including frustration that we were not being listened to (or our recommendations were not addressed).. In last year’s report we welcomed the fact that several of these key concerns had been addressed in the outcomes of the programme review published a few days earlier. This gave us considerable reassurance that the situation had changed and that our concerns had not only been heard but, to a considerable extent, were being acted on.

Over the past year we have felt that the quality of engagement between ABAB and HMRC has been excellent. We welcome the work HMRC is doing to allow multi-agent access. MTD ITSA is likely to change the way some taxpayers deal with their obligations, with bookkeepers filing the quarterly returns and accountants/tax advisers (often external for small businesses) dealing with finalisation. It is vital that all those acting for a particular taxpayer have the necessary authorisation and access. We have been keen to help HMRC understand the practical processes taxpayers will follow, from bookkeeping software (including perhaps a document capture app) through to finalisation software.

We still have a number of concerns about the programme, and we are pleased that HMRC have listened to us and understand the issues.

One concern is the quality of in-year tax calculations. It is important that taxpayers (and HMRC) understand the degree of accuracy. In some cases, where income reported via MTD forms the bulk of the calculations, they may well be fairly accurate; in other cases, where taxpayers have non-MTD income sources such as interest or dividends, or are due relief for pension contributions, gift aid payments and the like, the calculations will be far less accurate.

Accuracy will improve over time as more information is fed into the calculations, but in the short term it is important to manage taxpayer expectations. HMRC has taken this on board and is planning to issue clear ‘health warnings’ with the calculations.

The MTD ITSA system testing – the beta programme – is extremely important. In 2024 to 2025 we know that the numbers in the private beta will be low, partly because of the number of software products currently in the market and partly because of the restrictions on who can join.

HMRC is seeing a variety of income types in the private beta, but expanding the number of people who can (and do) join the public beta from April 2025 will be mission-critical to the success of the programme.

The system will need to give confidence that it can cope with businesses having a variety of accounts year ends and a wide variety of income and relief mixes. We will continue to monitor the numbers and variety of participants as the beta moves from the private to the public phase.

Very few of the more complex mixes will have been tested through the complete quarterly reporting and finalisation (effectively tax return submission) cycle before the first mandation date in April 2026. This represents a known, but still significant risk.

We noted the announcement on Budget Day regarding the lowering of the mandation income limit to £20,000 for MTD ITSA by the end of this Parliament, but we would urge a cautious approach: the system must surely prove that it can fully deliver the expected benefits at the first 2 mandation levels first.

Much of the focus to date has been on quarterly reporting, but we see great – arguably much greater – potential in the ambition to build prompts and nudges into software to help taxpayers get their record keeping right and to avoid common mistakes at the point of transaction recording.

Our Tell ABAB survey revealed a worrying level of lack of awareness about MTD ITSA. The survey also revealed that 75% of respondents believed that MTD would increase or significantly increase the time and cost involved in complying with their tax obligations; 64.3% also thought that this would be the case when required to keep digital records. Worryingly, 64.6% said they did not expect to see any benefits for their business or (in the case of agents) clients.

There is clearly work to do to change or address these perceptions and concerns.
As we have said in previous reports, we are fully supportive of MTD’s core aim of improving the quality of business records, but the timetable remains challenging.

All of that said, we feel that we are in a much better position to help HMRC achieve successful delivery than we were in 2022.

1.2. Tax Futures, Tax Administration 3.0 and Digital Transformation road map

ABAB was joined by the HMRC Futures and Innovation team, together with a representative from the Organisation for Economic Cooperation and Development (OECD) Forum on Tax Administration (FTA) to talk about Tax Administration 3.0.

This is an ambitious international vision embraced by tax administrations including the UK, all G7 members, countries as diverse as China, Colombia, Saudi Arabia and Kenya (which has led in digital tax payments), as well as regional organisations from multiple continents.

If Tax Administration 1.0 is the traditional paper-based approach, and Tax Administration 2.0 is adopting digital equivalents or e-administration, Tax Administration 3.0 involves radical rethinking of tax administration and how people interact with the tax system.

Rather than tax being an isolated activity, Tax Administration 3.0 sees tax embedded and integrated in the ‘natural systems’ that taxpayers use day to day. The UK has shown historical leadership in this through PAYE and automatic updating of coding. But we also have lots of opportunities to join up, through pre-population, automated processes and a ‘tell us once’ approach across government (such as around starting a family, and aligning reporting between different government departments).

Thus, Tax Administration 3.0 puts the citizen or taxpayer at the centre, not the tax authority. The citizen or taxpayer has multiple ‘touch points’ with the tax system, and mainly through intermediaries – their employer, their software, their bank, the digital platform they earn through, their investment platform.

Tax Administration 3.0 will also affect tax legislation. Instead of written legislation being interpreted and applied in software often separately by each developer, it encourages the software tax rules being part of the law itself (a principle described as ‘rules as code’), and shared algorithms.

While this is a direction of travel that will take many years, the principles behind Tax Administration 3.0 have the potential to significantly reduce administrative burden and we would encourage them to be included in HMRC strategic planning now, and particularly to make sure the foundational building blocks are being put in place.

This will not be without challenge to existing thinking. We’ve identified that Tax Administration 3.0 relies on trust in intermediaries (we are pleased the HMRC Intermediaries Directorate actively engages with ABAB), and the use of digital identities, which are the first building block that the OECD identifies, and feature throughout almost all the scenarios they set out.

We also want to make sure that initiatives are adopted deliberately, with value to businesses and not just data to HMRC, and will be taking a keen interest in e-invoicing.

Fundamentally Tax Administration 3.0 highlights that tax transformation relies on the ecosystem to deliver it. That’s why we encourage that HMRC take the opportunity to be genuinely collaborative in designing future initiatives, including in creating the Digital Transformation Road Map to reflect the whole tax system and not just HMRC.

1.3. Requiring employers to report employee hours in payroll submissions

ABAB has engaged actively with HMRC on this topic during the year. The Board does not yet understand the rationale for the proposal and we are very concerned about the additional administrative burden the proposals would impose on businesses of all sizes. The particular challenges we raised were connected to the fact that the data sought – which would be added to payroll submissions – is not normally held by whoever operates payroll, whether within the business or as an external provider.

The type of data required by the initial proposals included hours paid and then a number of other categories denoting payments not relating to hours paid. These will often be held by an HR department in larger businesses; in smaller businesses this information might be held by one of the directors or managers responsible for staff recruitment. Either way, more procedures and work will be required.

Details of payments where there is no time-related element could vary from pay period to pay period, resulting in significant additional effort required for every payroll run, increasing costs and administrative burden considerably. The additional burden would be both in gathering the data to be reported on a weekly or monthly basis and then entering this into payroll software for each individual employee.

HMRC’s team working up the proposal engaged directly with a subgroup from ABAB and we were jointly able to reduce the non-time related payment categories to a more manageable level, and also clarify how hours paid would be reported for salaried staff, allaying some of our concerns.

The measure has been delayed form April 2025 to April 2026, partly as a result of the change in government. This does mean that it will be introduced at the same time as MTD for ITSA mandation, and payrolling benefits in kind; representing a real triple-whammy challenge for payroll software providers and external payroll bureaux to be ready in good time and gather the additional information needed to fulfil the new reporting responsibilities.

ABAB remains unconvinced that this data is required for the purposes of administering the tax system, which is a requirement of the legislation. We are grateful to HMRC for their engagement so far, but there has been public questioning about whether collecting hours data fits within HMRC’S mandate, and should this go ahead, would recommend that legal advice be published.

Priority 2: Improving day-to-day performance

2.1. Customer service levels

ABAB remains concerned that HMRC has not been able to successfully tackle poor customer service levels, with our Tell ABAB survey showing year-on-year ‘poor’ ratings increasing from 40% to 57%.

It is disappointing that HMRC’s desire to move taxpayers to digital channels is hampered by satisfaction levels for web chat being significantly behind the already low ratings for telephone contact. This is a consistent and longstanding message from those who interact with HMRC.

ABAB was joined by the Chartered Institute of Taxation (CIOT) ahead of the publication of their own research in cooperation with the Institute of Accountants in England and Wales (ICAEW). They reported that in making 530 calls to HMRC, 24 working days were spent on hold, with about 5% of calls being disconnected after getting through to an HMRC adviser.

Much of this is not ‘value added’ work: 37% of attempts to call HMRC relate to progress chasing, and a further 10% relate to trying to fix an HMRC error or make an amendment.

Time spent trying to resolve issues is itself an administrative burden, and uncertainty damages business effectiveness. We know this is a priority for HMRC and look forward to measurable change next year.

2.2. National Audit Office (NAO) study on costs in the tax system

As in previous years, ABAB members supported other reviews that are relevant to the understanding of administrative burdens.

During 2024, this included providing evidence to the National Audit Office in respect of their investigation into drivers of costs in the tax system, due to be published this winter.

Priority 3: Closing the tax gap

3.1. Payrolling of benefits in kind reconsideration

In 3 reports in 2013 to 2014, the late lamented Office of Tax Simplification (OTS) looked at simplifying the whole area of employee benefits and expenses. A key component was payrolling benefits; the OTS showed how 4.5 million annual P11Ds could be eliminated, offering even then a saving of £160 million. ABAB has long championed the voluntary payrolling of benefits in kind. Eliminating the P11D process would not only free up HMRC resources but also reduce the administrative burden on businesses by integrating benefits reporting into the payroll system.

A key objective has always been to ensure employees pay the correct tax at the right time. Real-time payrolling of benefits facilitates immediate tax collection, thereby eliminating the need for numerous P800 forms at the start of the tax year. Since the 2017 to 2018 tax year, employers have had the option to voluntarily payroll benefits, yet the uptake has been disappointing.

The mandation of payrolling benefits has been under discussion for many years and is broadly supported by ABAB members and employers. However, the proposed implementation date of April 2026 – even with a ‘soft landing’ for penalties – is problematic.

Two benefits (accommodation and beneficial loans) remain un-payrollable (though the OTS did have suggestions 10 years ago) and HMRC has yet to clarify reporting requirements for these benefits. Can payrolling for these (relatively infrequent) benefits be achieved without additional year-end reconciliation burdens or the need for a ‘month 13’ to collect due taxes?

Concerns have also been raised about HMRC’s technological infrastructure. If employers are to comply, HMRC must provide clear guidance in a timely manner.

We recommend that implementation should only be after at least 18 months following the reporting requirements being published. Only that will allow for necessary software updates and adequate communication with agents and clients.

Many small businesses will also fall into the new MTD requirements and need to collect additional data from their employees in 2026 and this uncertainty and timeframe will add pressure.

ABAB urges Ministers to delay the mandation date and ensure that HMRC first enacts legislation to enable the payrolling of accommodation and beneficial loans, along with detailed reporting requirements.

3.2. Individuals and Small Business Compliance / HMRC Communications and Guidance

We continue to work with Individuals and Small Business Compliance (ISBC) and HMRC Communications and Guidance directorates on closing the tax gap. This work has delivered improvements to help businesses self-serve in areas such as setting up as sole trader, budgeting for Self-Assessment payments, Self-Assessment repayments, and registering for VAT. We look forward to further supporting activities in 2025.

What’s planned for 2025

We look forward to building on our initial meeting with the new XST, James Murray MP and developing relations into the productive dialogue we have enjoyed with many of his predecessors in the vital ‘tax minister’ role.

Within the priority areas set by XST, ABAB will continue to focus its work to address key administrative issues impacting small businesses, particularly:

• MTD for ITSA
• tax simplification
• customer experience
• basis period reform
• ‘Tell ABAB’ survey

At the recent autumn budget, the government announced it will be introducing a set of measures in the spring to simplify tax administration and improve customer experience. We welcome this.

We have contributed regularly to conversations with HMRC, making suggestions for the practical things that would make a difference to small businesses (such as re-using data already held by HMRC before asking for the same data once again; making improvements to the Single Customer Account; sense-checking changes before introduction to make sure any change will make something easier for small business and not harder).

We look forward to continued engagement with HMRC to help shape their thinking around tax simplification. We hope the opportunity will be taken to look at increasing administrative thresholds and generally exclude small businesses from burdens more appropriate to their larger brethren.

Conclusions

We need to repeat something we said in last year’s report. Our role is to be a critical friend to HMRC. This report must therefore highlight issues that require attention. We need to stress, however, that there has been real progress in some areas of our focus, as we have reported. We always recognise when progress has been made, as this can help inform future ways of working and indeed how improvements can be achieved.

We believe that there are lessons to be learned from the MTD project, not least the advantages of working with stakeholders from the earliest possible stage. Sharing the problem statement rather than HMRC’s proposed – and by that stage often partially designed – solution could enable HMRC to deliver projects with fewer flaws at greater speed and lower cost. We made the same observation previously on other projects and we would urge HMRC to adopt this way of working into all significant new projects.

We need to thank so many HMRC staff that we have met and talked to for their ready engagement, candour and willingness to listen. Long gone are the days when ABAB (and other groups) were viewed with some suspicion by sections of HMRC who guarded ‘their’ tax system with some jealousy.

Nowadays we have a positive, proactive engagement, underpinned by acceptance that the tax system belongs to all of us – HMRC staff, ABAB members, Tell ABAB survey respondents, et al. We all have a responsibility to work together to help HMRC deliver the better tax system that better businesses deserve.