As if the Chancellor hasn’t got enough on his mind trying to keep the UK from dropping back into recession, lawyers from the European Commission are unhappy about the recent Anglo-Swiss tax agreement.

According to the lawyers, the deal breaches European Union laws that take a tougher stance on tax evasion. George Osborne has been told to renegotiate the recently signed deal or be sued by the EU.

The new agreement protects the secrecy of UK residents who have Swiss bank accounts in return for a withholding tax and a large percentage of their capital.  The German government has also brokered a similar deal for its citizens and has now entered into new talks with Switzerland.

However, the EU claims the deal goes against the European Union Savings Directive. The EU’s tax commissioner, Algirdas Semeta, explained that if the problem cannot be easily resolved, the EU will have to pursue the matter through the courts.

Meanwhile, the Institute of Directors has said the UK government is not doing enough to attract overseas investors. The country’s tax system needs to be more competitive and the coalition should introduce incentives to encourage foreign businesses to invest in the UK and help fuel job growth.

The IoD’s director-general, Simon Walker, said the UK should be seen as the country of choice for international investors, and somewhere with a tax system that favours enterprise and hard work.

The tax system we have at present puts us in the middle of the 34 OECD nations, not in the front, he added.

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The Institute of Directors has criticised the coalition for failing to reduce the burden of tax on small businesses. Tax – the Weighty Burden, the annual report from the Institute, calculates that the true burden of taxation for SMEs is between 32% and 43%.

This burden is unlikely to reduce even when corporation tax rates decrease in 2014 because employers have to pay additional fuel duty, national insurance and business rates.

The head of taxation at the IoD, Richard Baron, said the burden of taxation is weighing growth down. Although it is not possible to make radical cuts at the moment, the government should already be making plans to reduce the heavy burden of business taxation.

Baron believes corporation tax needs to be lower than originally planned and employers’ NICs should also be reduced.

However, a recent report from the TUC suggests that cutting corporation tax further would have an adverse effect on the economy and job creation.

George Osborne believes that reducing the rate of corporation tax will entice companies to set up in the UK, which will help drive the recovery in the private sector. But Brendan Barber, the TUC chief, says this argument does not stand up.

The rate of corporation tax in the UK is already amongst the lowest in Europe. The OECD average is 26.5%, but in excess of 90% of small businesses in the UK pay 20% and the average for large organisations is 23.2%.

Barber said that we have extremely competitive corporation tax rates already. He went on to point out that some people, including Osborne, have been talking about emulating the aggressive low tax policies of Ireland, but the current economic problems there suggest that this is not a sensible option.

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Accountants should be aware that the end of the present tax year is fast approaching and HMRC has reminded the UK small business community that changes to corporation tax are imminent.

As from the start of the new tax year, corporation tax filing and payments will need to be made electronically. Furthermore, all company tax returns for accounting periods that ended after March 2010 will also have to be filed in XBRL or iXBRL format.

Payment of corporation tax will have to be made by Direct Debit, credit or debit card, using either bank transfer or the BillPay service.

An HMRC spokesperson explained that these changes will affect associations, charities, clubs, co-operatives and societies as well as any limited company. Firms will be able to use commercially available software to file or the department’s own CT software aimed at firms with less complex taxation affairs, the Revenue added.

As from April next year, firms will also have to submit their VAT returns online.

Meanwhile, the Institute of Directors is calling on the government to reduce corporation tax until it reaches 15% in 2020. People are starting to think of the UK as a high-tax economy and that will not encourage foreign companies to invest here.

The IoD wants the UK to have the lowest rate of corporation tax throughout the world. It has estimated that this could be achieved at a cost of £9 billion a year, a figure which could be achieved by continuing restraint on public sector growth.

By reducing corporation tax to just 15%, the UK would be sending out the strong message that it is open for business.

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The Autumn Statement from the government showed a revised prediction for economic growth next year. Previously the coalition has predicted growth of 2.3%, but this figure has now been lowered to 2.1%.

However, the IoD disagrees with this, claiming that economic growth in 2011 will be much lower. It likened the recovery cycle to a square root sign which has witnessed a temporary spurt in 2010 but will level off next year.

The IoD commented that the Comprehensive Spending Review has caused too much doom and gloom and the UK needs to realise that there are also other weaknesses in the economy. Lower than expected growth could cause George Osborne to increase taxes, a move which would affect contractor accountants and other freelancers. In fact, if the government’s predictions for GDP are accurate, the chancellor will have to choose between tax increases or further spending cuts if the coalition is to meet its budget deficit targets.

In other related news – although the government has committed to reducing corporation tax, the IoD claims that the new moves still do not go far enough towards attracting more foreign invest in the UK.

The IoD’s head of taxation, Richard Baron, said that whilst the Institute welcomed the fact corporation tax is set to reduce to 24% that still leaves the UK in the bottom half of the list of countries with an attractive rate.

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Basic administrative tasks relating to bookkeeping, invoicing and billing and filling out timesheets take the average worker in the UK 37 days every year, according to Keboko, the cloud service provider.

The cost of all this red tape amounts to more than £100 billion and could encourage freelancers to get help from a contractor accountant in a bid to reduce the amount of time they spend carrying out administrative duties.

Charlie Cowan, the CEO of Keboko, commented that companies should be trying to rebuild after the recession but instead many workers are finding it hard to do this as they are bogged down with tasks such as data input and updating reports. UK businesses are basically throwing the money spent on these tasks down the drain.

The burden of dealing with the taxman is also costing businesses dear, the IoD reported earlier this week. The Institute surveyed its members and discovered that there is still considerable room for reform to reduce the administrative burden surrounding taxes. The survey also discovered that 30% of businessmen would actually advise someone not to start up their own business because of the weight of the tax burden.

An overwhelming number of directors want to see the regulations concerning PAYE and National Insurance simplified. Business people sometimes struggle to understand the tax rules and have difficulty finding out the correct information when they contact HMRC. Only 15% of respondents said it was easy to get the right information when they called the HMRC helpline while a third said it was very or fairly difficult.

HMRC’s website does not fair any better either. 16% said they could find the information they needed easily but again 33% struggled to find what they needed to know.

Since the PAYE coding errors earlier this year, businesses have found it increasingly difficult to get through to the Revenue’s helpline. 37% of the directors who did manage it feel that the majority of HMRC officials have a poor understanding of the nature of their business.

Half of the directors surveyed said they want the OTS to simplify the PAYE and NI system and 28% said the taxation of employee benefits was the area most in need of simplification.

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The Institute of Directors has said that the government’s plan to reduce corporation tax is still not enough to encourage foreign businesses to invest in the UK.

Corporation tax rates recently fell to 28% and the coalition intends to reduce them further to 24%, but the IoD thinks they should be dropped further in order to attract foreign investors. A spokesman for the IoD, Alistair Tebbit, pointed out that the UK has one of the highest rates of corporation tax which means we are not competitive with other EU countries where the average rate stands at 23%.

The Institute has also called on government ministers to reform the IR35 rules that have long dogged contractors. The OTS is about to begin its review of the IR35 legislation and the IoD has already put forward its suggestions for change. As part of the review, the OTS will conduct a series of roadshows around the UK to find out what business owners think about the complexity and cost of small business taxation.

IR35 should be replaced by precise rules, along with a screening test, so that the majority of companies are taken out of its scope. But the IoD’s head of taxation also says that widespread reform of the small business taxation system could be an acceptable alternative.

John Whiting, the Office of Tax Simplification’s tax director, acknowledges that small business taxation is complex and the problem cannot be solved overnight. The OTS is due to inform the chancellor about the areas where simplification should be prioritised, before the Budget next year.

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HMRC has postponed releasing any Time to Pay data while it reviews the release of statistical information. A spokesman from the Revenue said that he could not say how long the review would take.

The Time to Pay arrangements allow businesses to defer tax payments and were set up during the credit crunch as a lifeline for companies that were struggling to meet their tax liabilities.

The president of the UK200Group, Colin Howe, remarked that the Business Secretary, Vince Cable, had recently told the Institute of Directors that his department had instructed the Revenue to continue to ensure that it would be easy for applicants to obtain Time to Pay arrangements. However, if HMRC doesn’t publish statistics, we won’t know if that is happening.

Tax expert Richard Mannion from Smith & Williamson said that the review doesn’t tie-up with HMRC’s message that TTP works. He believes that government spending cuts could be the cause of the review.

In the first 15 months of the scheme, 300,000 Time to Pay arrangements were set up, allowing £5.13bn worth of taxes to be deferred.

Meanwhile, the Regulation Policy Committee is calling for vigorous, independent scrutiny of all new business regulations. Vince Cable announced last week that the ‘one in, one out’ policy for new regulations will come into force at the beginning of September and the RPC would like to see Whitehall produce a robust analysis of all possible alternatives and implementation cost estimates prior to the formation of new regulations.

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Vince Cable, the business secretary, says that banks are making it harder for small firms to apply for loans despite claims from the semi-nationalised banks that they approve at least 80% of loan applications.

Stephen Pegge, the chairman of the small business panel at the British Bankers’ Association, claims other business bank accounts are also matching this rate.

Mr Cable said these claims are misleading and cited proof from business industry bodies such as the Institute of Directors that shows that the banks are not meeting demand.

The IoD recently published research which found that around 33% of UK businesses had been refused banks loans. However, there has been some improvement as similar research conducted last year found that 57% of businesses were refused finance.

The BBA has also released figures showing that net lending by the banks was at an all time low in May. £500m was lent to SMEs but the banks collected more than that in repaid debts and withdrawn overdrafts.

A consultation is to be launched this week to discuss business finance and it will consider whether there would be any benefit to be gained by forcing new targets on the two semi-nationalised banks; RBS and Lloyds. Cable thinks that mandatory action forcing the two banks to make more finance available could be an attractive option.

However, the Labour government was unable to force Lloyds and RBS to meet lending targets to limited company contractors even though they were legally binding and a spokesman from the Treasury said that the coalition was still considering whether a new target based option would be effective.

The consultation will also look at other business financing alternatives. The coalition has already said that using equity finance could be one possible option. Currently only between 1 and 2% of SMEs use this option and the financial secretary to the Treasury, Mark Hoban, says that the majority of small businesses are missing an opportunity. To encourage more freelancers and SMEs to take up the option, Vince Cable also suggested recreating 3i, a private equity organisation which provided equity for small, expanding businesses.

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