In the past there was always a belief that large corporations with the ability to develop mass-production techniques and gain from economies of scale would eventually dominate the UK economy. Many thought that economic growth depended upon the fortunes of large organisations and that the movement towards global companies would eventually confine small and medium-sized enterprises (SMEs) to a minor role within the UK economy.
Employment by a large business would represent security, opportunity and possibly a 'job for life'. However, these beliefs ignored the effects of economic downturns in various parts of the world as well as the drive for increasing efficiency and increased global competition would have upon the fortunes of large businesses. Since the 1980s, the process of downsizing by many major businesses has taken place alongside the development of an enterprise culture that has caused resurgence in the SME sector.
This massive expansion in the number of SMEs since 1980 has taken place despite the sometimes difficult and hostile environment which threatens micro organisations from many directions. For example, competition from larger organisations, bureaucracy and regulations, high bank charges, changing interest rates and environmental uncertainty are frequently cited as making life difficult for small businesses, which are often felt to be the most vulnerable members of the business community.
This case study illustrates how HM Customs & Excise, one of the oldest UK government departments, works supportively with small businesses by helping them to understand various laws and account for Value Added Tax (VAT) correctly and efficiently.
The case study illustrates how the department plays a crucial role in providing supporting services that balance the interests of SMEs and help to reduce the burden of bureaucracy and uncertainty in their business environment, with the wider interests of society.
HM Customs & Excise
HM Customs & Excise is a department that has constantly had to adapt to change, such as wider political and economic changes influenced by successive governments and their fiscal policies, to wider initiatives such as that of the Euro.
Every organisation needs a purpose or mission that sets the direction for its activities. The aim of Customs & Excise is 'to provide a world class tax and customs service in accordance with government objectives' this is achieved by:
- collecting a range of duties and taxes accurately, on time and in a courteous and impartial manner
- protecting UK and business interests through the control of imported and exported goods
- preventing the illegal import (and export) of socially unacceptable or politically sensitive materials.
So, as well as bringing in around 40% of central government's total taxation yield including more than £50 billion in VAT receipts, Customs & Excise has a unique role as a front-line organisation for protecting society against the threat of illegal drugs, firearms and paedophile materials.
Creating an efficient and fair system for collecting taxes
Up until the end of the nineteenth century, the functions of the state were mainly defence and law and order. Today, we live in a society where government spending provides us with a range of services and benefits, such as education, protection against the hazards of sickness, local authority services, support for agriculture, police, law-enforcement and fire brigades. Financing these services requires the government to raise funds through taxation and to influence the allocation of resources within our society.
The activities of organisations and individuals create both benefits and costs for society. For example, a new factory may create jobs and help to improve the overall profitability of an organisation, but at the same time roads may need to be improved and maintained, schools and housing stock may have to be improved and other services for the community may be required. There may also be detrimental effects from the factory such as extra traffic congestion, increased litter or some form of pollution.
Both the individuals and the organisation who benefit from this activity also therefore, have an ethical responsibility to contribute towards some of the costs.
It was Adam Smith in his book, An Inquiry into the Nature and Causes of the Wealth of Nations, who said that the principles of taxation should be confined to four simple tenets:
- persons should pay according to their ability
- the tax should be certain and clear to everybody concerned
- the convenience of the contributor should be studied as regards payment
- the cost of collection should be small and relative to yield.
While the clear purpose of taxation is to raise money, a good system of taxation should have many different attributes. For example:
- the cost of collection should be low
- taxpayers should know when and how to pay their taxes
- tax payment should be convenient
- taxes should be adjustable and be capable of being used to regulate the economy
- taxes should also be harmless to effort and initiative and be fair.
The two UK departments that deal with collecting taxes are Inland Revenue and Customs & Excise.
Whereas the Department of Inland Revenue is concerned with collecting direct taxes, HM Customs & Excise collects indirect taxes. Both of these departments help in developing an efficient and fair taxation system that provides businesses and other taxpayers with an efficient and responsive service to meet each of their needs.
What is VAT?
VAT was introduced as an indirect tax into the UK in 1973 to replace Purchase Tax and Selective Employment Tax. VAT is a tax on the final consumption of goods and services, collected at every stage of production and distribution.
All EC Member States are required to implement VAT in line with the provisions of the Sixth Directive. The UK introduced VAT in 1972 when it joined the European Community (VAT replaced Purchase Tax and Selective Employment Tax.) The current VAT threshold is £54,000. This means that if a business organisation either makes a supply of goods or services or is paid for supplying goods and services above this amount, they have to register for VAT. Once registered an organisation is issued with a VAT registration number that must be quoted on all of its invoices.
There are three rates of VAT:
- a standard rate, currently at 17.5%
- a reduced rate of 5% on domestic fuel and power and on the installation of energy saving materials
- a zero rate (nil) on certain essential items such as most food products and children's clothes.
VAT is a value added tax, so the only tax paid is on the value added by the organisation. This means that those who are registered for VAT must pay to HM Customs & Excise the amount they have collected (levied by them on their sales or output), less the amount of VAT that has been charged to them on the taxable supplies of goods or services bought in.Conversely, if the amount of VAT paid has exceeded the VAT collected, the organisation can claim a refund from HM Customs & Excise.
For example, if a manufacturer sells goods for £100 to a small business, £17.50 will be added to the invoice price, so that the final amount paid will be £117.50. If the small business sells the goods on for £150.00, they will in turn add £26.25 to their customer. The VAT paid by the small business will be £8.75, comprising £26.25 (output tax) less £17.50 (input tax). The amount paid is therefore simply based upon the value added created through the transaction.
VAT registered businesses keep a VAT account as part of their records. This account records the VAT paid on inputs (purchases of goods or services), and the VAT collected on outputs (sales). This account forms the basis for filling in a Value Added Tax Return.
A recent survey showed that customers want a single point of contact and not to be passed from 'pillar to post' or one enquiry desk in one department to another desk in another department. Similarly they want efficient services that are easy to use and that respond to their own needs and requirements. As part of this process they do not want to be inundated with paper trails or constant changes in regulations and requirements.
Providing reliable and high quality services that help SMEs to meet both their obligations and deal with their concerns is essential to the VAT collection process. Although the situation is inverse in that consumers are taxpayers, they are the natural resource upon which the financing of public services depends.
The dialogue, services and relationships developed between HM Customs & Excise and its VAT payers therefore help to ensure that taxation services are efficiently delivered at the lowest cost for the department and with low costs for businesses.
For example, as part of the HM Customs and Excise service delivery agreement, the department is:
- actively looking for measures that help businesses to get their indirect tax returns right the first time
- increasing its contacts with business organisations
- modernising and improving consumer services using information technology, so that by the end of 2005, 100% of all external services will be available electronically (and there will be a 'make-up' of at least 50%)
- working with the Inland Revenue for the common delivery of VAT and self assessment tax payer services through a single gateway working with the Inland Revenue to research into establishing the costs of collecting and dealing with taxation, and then how these might be reduced
- seeking to improve customer satisfaction with improvements in a range of customer services
- providing businesses and Government with the information they need to improve competitiveness and economic policy through the development of a customer focused trade information service.
The Small Business Service, an agency of the UK government is offered through Business Link to provide advice and information for SMEs so that they can keep abreast of changes and express their concerns.
Although regulation and taxes are a necessary way of life, the Small Business Service seeks to provide advice and help wherever it is required. Similarly HM Customs & Excise has its own National Advice Service which is available to answer any queries and give general advice.
The growth of e-business means that in the future customers will receive 'joined-up government', with one-stop shopping for public services all from the same point of contact. Businesses will be able to access all communications from a single point and with common standards for business customers.
Customers will be able to be provided with targeted and focused advice on services. Paperwork will also begin to become a thing of the past, with the Electronic VAT Return making the whole process of compliance straightforward. This automation of business operations will also help staff from HM Customs & Excise to move away from more labour intensive activities to focus more upon providing better customer service, while at the same time reducing the cost of operations.
The external business environment has always had a huge impact upon the health of SMEs. Although there are many more SMEs than there were 20 years ago, these organisations now more than ever, require support and help as they pursue and develop their activities.
This case study illustrates how working with other departments Customs & Excise has focused its attention upon meeting the needs of SMEs in a way that enables businesses to operate in a more certain environment so that each organisation can have firmer control over its own future.