A new report from the Federation of Small Businesses (FSB) reveals that tax compliance is placing an immense strain on the UK’s small business community, costing nearly £25 billion annually.
According to the report, titled Taking a Toll: Small businesses and the cost of tax compliance, small business owners spend an average of 44 hours each year on tax-related tasks. Three in five respondents said that dealing with HMRC had contributed to increased stress levels.
Based on a survey of over 1,400 small business owners, the report calculates not just the financial cost, but also the time and emotional toll of engaging with the UK tax system. These burdens reduce productivity, divert resources from growth, and ultimately hinder wider economic performance.
The average small firm spends £4,500 per year on tax compliance, covering time spent contacting HMRC, staff time, software subscriptions, and fees for external accountants.
A recurring theme in the report is poor customer service from HMRC, which is making an already demanding system even more difficult to navigate. Over half (52%) of small businesses reported difficulties contacting HMRC. While 68% used the phone as their primary method of communication, only 23% rated their experience as good.
This has had a tangible impact on wellbeing, with 60% of small business owners reporting that their stress levels had increased as a result of dealing with HMRC.
The report also highlights concerns around the rollout of Making Tax Digital (MTD). From April 2026, businesses with annual turnover over £50,000 must comply with MTD for income tax self-assessment, extending to those with turnover between £30,000 and £50,000 from April 2027. Yet 27% of firms affected by these changes say they still don’t know when they’ll adopt MTD-compatible software, exposing a worrying digital gap.
FSB’s Policy Chair, Tina McKenzie, commented:
“Tax compliance affects every one of the UK’s 5.5 million small businesses. On average, each spends £4,500 and 44 hours annually on tax administration – collectively amounting to £25 billion and over 240 million hours every year.
This is time and money that could be far better spent growing their business. The current system is stifling productivity and holding back economic growth.
The Government has committed to improving regulation to support growth – HMRC must be included in that mission.”
Key Recommendations from the FSB Report:
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Reduce tax admin costs by a third by 2028
HMRC should target an average annual compliance cost of £3,000 per business, and publish yearly progress reports. This aligns with broader Government efforts to ensure regulation supports growth. -
Introduce a ‘duty of candour’ for HMRC tax officers
Officers should be required to inform small business owners under investigation about their rights, and disclose any implications of concessions made during the process, to build trust and transparency. -
Set time limits on tax investigations
Currently, investigations can last for years. FSB calls for enforceable limits, with extensions only permitted in exceptional cases. -
Review pricing of MTD-compliant software
As more small businesses become subject to MTD requirements, the Government should consider regulating software pricing to prevent unjustified cost increases. -
Improve HMRC response times
HMRC should be held to its internal target of responding to most tax queries within 15 days, and not exceed the statutory maximum of 30 days. Annual performance against these targets should be published.
Tina McKenzie added:
“Reducing tax admin costs by a third is achievable – but it will require significant improvements to HMRC’s systems and customer service.
Many business owners tell us how difficult it is to get clear answers or updates from HMRC. With plans to recruit thousands of new compliance officers, it’s crucial that customer service doesn’t get left behind.
Lengthy investigations add immense stress and uncertainty. Swift, clear communication from HMRC must become the norm – not the exception.
As Making Tax Digital expands, the need for a tax system that is easy to navigate becomes more urgent.
We need a system that works with small businesses, not against them. Our proposals offer a clear path forward – now it’s time for HMRC and the Government to act. Getting this right will unlock small business potential and drive the growth our economy needs.”
Info obtained here
