A new study has claimed the Treasury's working tax credit is adding an average of five per cent to small business payroll costs.

One of the academics who carried out the research said that small businesses are being burdened with "more and more" of the costs and bureaucracy of government  initiatives.

Stakeholder Response: Economic and Research Council

Dr Colin Lawson and Michael Godwin of the University of Bath, who conducted the research, said:"Tax credits have been a major plank in the government’s campaign to get more people into work, but the system has met criticism from business on the costs of implementation. The research puts the annual cost to employers of payroll administration, including administering tax credits, from as low as £20 per employee to as high as £100 plus. Costs tended to fall as the size of the payroll increased.

"Payroll costs for the Working Tax Credit varied with the type of business. Higher costs were most often found in retail and catering and other low pay industries that have a high turnover of workers. One cleaning services company said its payroll administration rose by 40 per cent as a result of implementing the Working Tax Credit.

"Other respondents reporting increases of 10 per cent and more included a small manufacturer, a machinery hire company, a large education establishment, and a small consultancy advising IT contractors. Companies in low pay industries said they have a lot of problems in operating the new credit. Some big employers reported that they had encountered multiple problems.

"Many companies criticised the rash of amendments coming from the government with which they had to deal. Extensive teething troubles, especially with Inland Revenue’s new computer system, caused widespread additional problems and costs."

Stakeholder Response: Association of Chartered Certified Accountants

A spokesman for the ACCA said: "The research supports previous evidence which clearly demonstrates that tax administration is found to impose the heaviest burden on small businesses. The smaller the business, the heavier the red tape cost ("The Impact of the Budget on the Small Business Economy", Chittenden, Poutziouris and Michaelas, Manchester Business School, 2000).

"There has been little evidence of any progress by governments to address this and reduce the relatively higher burden of tax compliance costs on small firms in a substantive way. Indeed, some new initiatives, like the working tax credit do appear to be having the opposite effect."

Stakeholder Response: Federation of Small Businesses

A spokesman for the FSB said: "The FSB is calling on the chancellor to free small employers from the burden of administering tax credits through the payroll and to arrange for them to be paid directly in to an individual's bank account.

"The majority of small businesses do not have a dedicated HR or payroll department and so the task of administering tax credits falls squarely on the shoulders of a single owner or manager. Moreover, as this week's study demonstrates, the delivery of  government tax credits through the pay roll adds an average of five per cent to the administration costs for a firm or as much as £100 per year. Then there is also the issue of privacy.