Open Banking as a Tax Solution for SMEs

According to the FSB at the beginning of 2020 there were 5.9 billion small businesses in the UK which was an increase of 1.9% from the previous year. With approximately 6 million businesses in the country in total this means that SMEs make up 99.9% of them all. However in FSB’s most recent Small Business Index study the future for these SMEs does not look so favourable. Close to 5% of companies expect to close down in 2021 and this number doesn’t include those who’ve temporarily suspended their business with no firm idea of the outcome. For those businesses still operational, a significant amount of them report lower profits and a cut in the number of employees. FSB National Chairman Mike Cherry sees this worrying trend as being a result of lockdown restrictions surpassing the measures put in place to help SMEs survive. 

In the midst of this uncertainty, HM Revenue & Customs (HMRC) is looking into how SMEs and those in self-employment can benefit from open banking enabled products. This has the potential to simplify their administrative procedures, helping them to save time and money. HMRC issued a request for information (RFI) inviting fintech companies and other suppliers to provide knowledge on how real-time financial transaction data might be used for automated tax calculations and payments by SMEs, sole traders and self-employed individuals. This would be driven by open banking providing that a SME or individual gives consent for their data to be shared. This would be a vastly streamlined process compared to the current annual self-assessment. HMRC had already mentioned in Global Government Fintech back in July that they were working with the Open Banking Implementation Entity (OBIE) through the Government Banking Service to look into the benefits of open banking. These are encouraging signs for the development of the sector. 

The future potential of open banking to help the largest business population in the UK with tax processes is promising. However, open banking is already being utilised by early adopters for various use cases. In a study last year by the OBIE and Ipsos MORI, 500 SMEs were asked about their finances during the pandemic. Around half of the companies reported using open banking enabled products to streamline their businesses. The survey also showed that those businesses not already using open banking are only reluctant to do so due to lack of awareness. Open banking use cases for SMES are broad. From tax calculations and transaction management, to loan applications and credit checking customers, there’s a lot of potential for small businesses both now and in the future. New fintechs are emerging every week and traditional financial institutions are modernising their products and services in line with PSD2. However, education is still a work in progress. SMEs need to know more about how open banking can benefit them, not just to get the most out of their money but also to save time which can then be spent on revenue generating activities. They also need to understand how the data sharing works, what consent they need to give and how it is secured.