ICAEW research and member insights reveal that many feel it it is too difficult to do business in the UK, with a complex VAT regime, time wasted dealing with HMRC and duplication of reporting requirements. As part of its campaign to back business-led growth, ICAEW has explored the issues and possible solutions.
1. VAT is too complicated
VAT is vital but needlessly complex. The UK’s many VAT zero rates/exemptions create costly borderline calls, illustrated by HMRC v Innovative Bites [2025] EWCA Civ 293 a case about ‘Mega Marshmallows’, a £500k dispute about zero-rated food vs standard-rated confectionery.
The Court of Appeal’s broad test, that any "sweetened prepared food normally eaten with the fingers" is confectionery unless that result would be ‘absurd’, risks sweeping in quirky products (for example, an M&S strawberries-and-crème ‘sandwich’) unless classed as cake or deemed absurd.
These grey areas force firms to hire VAT specialists for routine launches, burden the courts, divert HMRC in classification fights, and food is only one of 50 categories with reduced rates or exemptions.
Evidence
A system that’s “old and outdated”: After 50 years, VAT design choices have become fixed, leaving rules that no longer fit today’s economy.
Multiple rates and exemptions: Four VAT categories (20%, 5%, 0% and exempt) create complexity and disputes (notably on food), with evidence that reduced rates don’t deliver fairness to consumers.
Path dependency and resistance to change: Historic choices, special-interest lobbying and public biases (status-quo, loss aversion) make simplification politically hard. Even modest reforms, such as the 2012 “pasty tax”, trigger backlash.
Business “lock-in”: Firms have invested in processes and technology tuned to the current rules and often push back on reforms that would invalidate those investments.
Administrative burden and risk on businesses: Complexity raises the risk borne by businesses who effectively collect VAT for government.
Digitalisation lag: Digitalisation has stalled relative to international best practice; awaiting outcome of e-invoicing/real-time reporting consultation.
Inconsistent experience across taxpayers: Smaller, less-digitally-confident businesses face anxiety and costs, while larger businesses struggle to justify further change amid delays.
Revenue inefficiency: A significant VAT tax gap exists, at least partly due to complexity.
Registration-threshold cliff edge: The high £90,000 threshold causes ‘bunching’ just below it and discourages growth. ICAEW has discussed smoothing or rethinking entry into VAT.
Solution
Redesign the VAT system for the 21st century
- Use post-Brexit flexibility to redesign a more consistent, modern VAT.
- Broaden the VAT base/simplify rates (move toward fewer rates; review zero/reduced rates) - framed as the logical end-state and a simplifier.
- Raise the VAT registration threshold to £150,000 by the end of this parliament.
Take advantage of modern technology
- Commit to e-invoicing and real-time reporting (by 2030) with a clear roadmap so businesses can plan investments.
- Leverage digital reporting to narrow the VAT gap (explicit goal of the programme).
- Coordinate with international initiatives, for example, EU ViDA, and aim for interoperable rules.
Tackle delivery blockers
- Adopt “evolution, not revolution”: Phase reforms; prioritise politically-deliverable steps; time and message changes well. Build a coalition of stakeholders, at home and abroad.
- Improve the user experience and agent capabilities: Expand what agents can do. Give clearer, tailored guidance for different taxpayer types.
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2. Poor HMRC service is wasting SME's time and money
Small firms are facing long delays, unanswered queries, and inconsistent advice from HMRC. Getting basic tax issues resolved can take weeks or months, forcing businesses to spend more on accountants and staff time just to stay compliant.
This service gap pulls owners and finance teams away from running their business, undermining productivity and slowing growth. Despite the government’s push to cut regulatory burdens, HMRC is not included in its red-tape-reform programme, leaving a critical blocker untouched.
Evidence
HMRC service delays and inefficiencies cost UK small businesses £24.8bn a year in lost time and money according to the Federation of Small Businesses (FSB). The FSB data published in April 2025 calculated the cost at an average of £4,500 per firm.
The FSB estimates that improving HMRC service could cut this burden by £1,500 per business, saving the economy over £8bn annually.
The Treasury Committee has heard businesses cite long call wait times, slow correspondence, and inconsistent answers as major pain points, with some tax disputes taking up to 12 months to resolve.
Where businesses use agents to act on their behalf, agents also face difficulties contacting HMRC and, if they do get through, they often cannot resolve their client’s query on the first attempt. This was evidenced in ICAEW and the Chartered Institute of Taxation (CIOT) report "Tackling HMRC’s customer service challenge", which tracked attempts to contact HMRC by agents over a six-week period.
Solution
Introduce an external tracking mechanism: To allow taxpayers and agents to track that HMRC has received their correspondence, as well as to which team the correspondence has been allocated and to check progress, including being able to view status updates.
Review and improve internal tracking mechanisms: To tackle lost correspondence, inconsistencies and repetition, therefore, saving time.
Ensure there are appropriate routes to escalate complex cases: To help resolve problems more effectively without prolonged and repeated interaction with HMRC customer service. The personal tax query resolution service is a good start.
Improve individual ownership of work: To improve resolution rates, building trust and reducing further contact.
Improve education and training of HMRC staff: To increase consistency and resolution rates, building trust and reducing ‘answer shopping’ by getting things right first time.
Invest in customer service staffing: To increase capacity and output, easing the burden on existing HMRC customer service staff and reducing backlogs and delays.
Maintain investment in legacy systems: To ensure that taxpayers and agents who have no choice but to use legacy systems receive a sufficient level of customer service and functionality.
Identify and plug gaps in digital services: To ensure HMRC’s investment is targeted at making meaningful changes to the digital services that taxpayers, and agents, want and need. Agents need to be able to see and do everything their clients can.
Increase the use of secure email for agent communication: To help meet agent demand for digital communications.
Co-create and continually improve digital services: By working collaboratively with taxpayers and agents to better inform design and testing, and make vital changes post-implementation to ensure digital systems work.
3. HMRC charges a higher interest rate than it pays
Businesses owing tax to HMRC pay a higher interest rate than it pays in return.
Evidence
Late-payment interest due to HMRC = Bank Rate +4pp.
Repayment interest due from HMRC = Bank Rate –1pp with a 0.5% floor.
From 6 April 2025 this equates to 8.0% vs 3.0%.
Solution
Reduce the disparity in HMRC interest rates
The rate of late payment interest was increased by 1.5 percentage points from April 2025. While we understand that HMRC is looking for levers to reduce the intractable amount of tax debt that built up during the pandemic, if businesses cannot afford to pay their taxes, they will also not be able to afford to pay an increased amount of interest.
By contrast, businesses are complaining about the increased time that it is taking HMRC to process tax refunds. While we recognise that checks are necessary to protect against fraud, HMRC should also be financially incentivised to resolve repayments promptly.
4. A confusing, uncoordinated support system
Government support for businesses is fragmented across departments and regions, with multiple portals, criteria, and processes leaving SMEs unaware of or unable to access vital schemes. This disjointed system means too many firms miss out on vital opportunities to invest, innovate and expand.
Evidence
UK business support is spread across departments and regions, with many small, short-lived initiatives lacking coherence. Multiple portals and differing local authority processes delayed schemes like the Restart Grants. Reflecting this fragmentation, only 26% of SME employers sought external advice or information in 2023.
Complex rules and delays excluded many firms. One such example, is the government's Kickstart Scheme, which has a 30-job minimum threshold, regional disparities that cut funding by one-third in some areas, and long grant processing times that worsened SME cashflow. Broader finance access is also deteriorating with loan approval rates for SMEs falling below 50% in 2023 (down from 67% in 2018), in the same year banks closed 140,000 SME accounts.
Many SMEs remain unaware of or overwhelmed by support. Small firms report “hours Googling” grants, manufacturers seek clearer guidance from councils, and uptake of Help to Grow has been low. Despite government grants totalling £153bn in 2023–24, the existence of 1,847 separate schemes has contributed to underutilisation and confusion. Help to Grow Digital saw 830 vouchers redeemed against a target of 100,000 (1,507 applications were received).
Solution
Smart signposting with an SME passport
- Create an “SME passport” (using the Business Growth Service) to provide UK-wide and local support through a single portal, show live eligibility and availability and partner with private providers to enable key business functions to be completed in the portal with a service guarantee.
Simpler applications by design
- Standardise and simplify applications (forms, criteria, timelines) across departments; co-design schemes with sector councils; publish clear processing speed/consistency KPIs.
Promote and incentivise to improve take-up
- Run readiness programmes through Business Growth Service backed with vouchers so SMEs can buy accredited advice, target and promote to increase uptake, especially in the 'IS-8' (the eight sectors identified in the government's Industrial Strategy and growth driving). and increase Start-Up Loan limits.
5. Annual reports are too long
Annual reports are so long investors can’t find the information they need. Businesses face growing demands to disclose non-financial information within their annual report. While these disclosures aim to enhance transparency and accountability, their nature and volume is obscuring the core purpose of the report, as well as creating additional administrative burden.
The annual report should provide material information that is useful to existing and potential investors, creditors and other lenders in making decisions relating to the provision of resources to the entity.
Where non-financial information serves broader public policy objectives rather than providing material information to the primary users, that information should be presented outside of the annual report, allowing the annual report to focus on its intended audience.
Evidence
Complexity and duplication
- Piecemeal development: A patchwork regime developed over time has resulted in duplicative and overlapping requirements. Similar requirements appear in multiple sections (strategic, directors’ and remuneration reports).
- Complicated thresholds: Multiple and inconsistent scoping rules make requirements difficult for companies to navigate without specialist advice. Creates uncertainty and extra work.
Fragmentation and lack of coherence
- Multiple frameworks: Multinational businesses must navigate UK and other sustainability frameworks, which can be costly and resource-intensive.
- Uncertainty on ISSB adoption: The lack of clarity, until recently, on scope and timing of UK Sustainability Reporting Standards (UK SRS) implementation has been making it difficult for businesses to plan and prioritise.
Lack of clear purpose and scope
- Blurred role of the annual report: Investor-focused reports are crowded with policy-driven disclosures. This information may be needed, but it should be segregated from investor reports.
- Difficult materiality judgments: With unclear objectives, companies over-disclose to mitigate risk.
Solution
Establish principles
- Clarify purpose: Clarify the annual report’s purpose; that will then guide decisions on what non-financial information to disclose, and where it should be placed.
- Match with the intended audience: Focus on matching the purpose of the disclosure of information with its intended audience will improve the quality and accessibility of information.
- Disclosure options outside of the annual report: Other options might include an annual-return style document filed at Companies House, via a web-based portal.
Streamline
- Build on the threshold uplift: Simplify and reduce the number of different thresholds for clarity and easier scoping.
- Eliminate duplication: Rationalise overlapping and duplicative reporting requirements
Align
- Endorse UK SRS: Adopt the ISSB’s globally recognised baseline for sustainability reporting by endorsing UK SRS.
- Proportionate SME framework in sustainability reporting: Work with ISSB/ARGA to develop a scaled approach for smaller businesses, similar to the approach taken in financial reporting.
- Equivalence in sustainability reporting: Work with the EU towards equivalence between UK SRS and CSRD (Corporate Sustainability Reporting Directive).
6. Firms missing digital dividend
UK businesses are missing out on a massive digital dividend. SMEs struggle with poor connectivity, siloed data, high costs, and a lack of digital skills. Fragmented initiatives mean many miss out on the benefits of digital transformation.
- Poor connectivity and outdated systems hinder productivity and competitiveness. The UK lacks a cohesive approach to smart data sharing, which would allow businesses to benefit from sector-wide insights and innovation.
- Businesses often struggle to understand and implement new technologies due to limited guidance, support, and access to skills.
Evidence
Businesses highlight patchy connectivity and siloed systems: Official data show uneven access and take-up: only 63% of UK SMEs are within reach of full-fibre (just 51% in rural areas), with 5G present at 42% of urban sites vs 16% of rural.
Adoption of key platforms is also incomplete, according to data from the Office for National Statistics (ONS) (69% cloud, 61% specialised software; AI only 9% of firms in 2023). The government estimates wider data mobility could increase UK GDP by £27.8bn per year.
Cost, complexity and a confusing market slow uptake: Business leaders report big licence fees and difficulty choosing AI tools. Firms most often cite difficulty identifying use cases (39%), then cost (21%) and lack of AI expertise (16%) as barriers to adoption according to the ONS.
Skills and security gaps expose SMEs: Employers say curricula aren’t delivering workplace AI skills, while SMEs are on the front line of cyber risk. Government employer skills survey 2022 revealed: digital skills were lacking in 32% of skill-shortage vacancies, with basic digital skills making up 48% of those digital gaps. Yet only 12% were aware of the National Cyber Security Centre's (NCSC) 10 Steps to cyber security and just 3% adhered to the government's Cyber Essentials certification scheme.
Solution
Patchy connectivity and siloed systems
- Deliver Smart Data across sectors: Set common APIs/standards, a clear rollout timetable and governance. Prioritise use cases that unlock SME data flow (for example, finance, energy and tax/e-invoicing)
Cost, complexity and a confusing market
- Encourage and facilitate the use of standards: Use outcome-based standards/certifications and tools such as regulatory sandboxes so regulators can observe and learn and firms can experiment without freezing innovation. Publish cross-regulator guidance in one place.
- Create an SME passport as a single Business Support Portal within the new Business Growth Service: A true one-stop shop that routes queries and applications to the right bodies, as well as reusing data already provided. ICAEW urges the government to not front-end immature systems with an LLM.
Skills and security gaps exposing SMEs
- Upskill at scale, with lighter administration: Expand digital/AI bootcamps and simplify and implement the AI Upskilling Fund (small, fast grants or matched vouchers; micro-credentials employers recognise).
- Cut duplication in reporting and penalties: Create a “tell government once” system via common data layers. Align incident/cyber reporting to avoid multiple fines for the same event.
More recommendations
Drawing on members expertise and our research into business confidence, ICAEW has outlined recommendations to policymakers advice on how to approach regulating for growth.
Find out moreDownload