Briefing update for Making Tax Digital.
Making Tax Digital (MTD) has two main strands:
We have had some informal discussion with HMRC on the former and none at all on the latter. The proposed changes will have a significant impact, on small businesses in particular, but also self-assessment taxpayers, beginning with those whose tax affairs are more straightforward.
ICAEW supports HMRC’s digital transformation and considers that for the tax system to be fit for the 21st century, a “digital first” approach has to be the right way. In practice, we are reassured that the Making Tax Digital policy will not amount to quarterly tax returns as we know them now, but will involve submitting income/expenditure information in summary “at least” quarterly. As yet, we have no details of what these submissions might look like or contain, but they will be summaries rather than transactional.
We are, however, extremely concerned with the proposal to make quarterly digital reporting compulsory. We are yet to be convinced that this will reduce the administrative burdens on business, particularly the smallest businesses. We also believe digital transformation needs to be done in parallel with the overall simplification of tax policy.
We have already expressed our concerns at Ministerial level. This has been through face-to-face meetings and also through correspondence. We sent a letter signed by five professional bodies on 11 December 2015, shortly after the proposal was announced in the Autumn Statement. We have also briefed all MPs on our concerns.
It is important to note that HMRC’s consultation on how the policy will be implemented is more around how to raise awareness of its existence than on exactly what is to be required. Events planned by HMRC include roadshows, workshops, webinars and roundtable sessions, but to date, little information has been shared beyond that published in December 2015.
We do not know, for example, but have asked the following questions.
We understand that quarterly updates will be capable of being aligned for a VAT registered business.
There will be consultation later in 2016 on the sanctions and penalties to accompany MTD. There will be consultation on a possible de minimis rule although how this would operate is uncertain.
Government has promised that software will be provided free at the point of use to businesses. For some businesses, it is likely that the free packages on offer may not be sufficient to replicate the paper-based accounting that they use currently, so forcing them to buy a bespoke package. Some businesses will have to buy their first computer.
The Government is concerned that part of the “tax gap” is down to poor record-keeping, particularly in the SME sector and that quarterly digital reporting will help to address that. We do not believe that the solution to poor record keeping is to impose a new requirement on the self-employed and businesses of all sizes to keep their records digitally (if this is the intent) and submit them to HMRC quarterly. Nor have we seen any evidence from HMRC to suggest that the consequence of poor record keeping is under-declared income; on the contrary, it is often under-declared expenses because the receipts have been lost.
Many small businesses keep handwritten records that align with the needs of the business and are more than sufficient to enable them to submit correct and complete tax returns. From 2018, they will have to abandon a record-keeping approach that works for them, and is tax compliant, and go digital. If the Government believes that record-keeping needs to be improved, then it would be helpful to understand the particular areas of concern and that HMRC should work with the professional bodies to see how improvements could be made.
Smaller businesses are being required to move to MTD before larger businesses. We understand that the first quarterly updates will be required by non-VAT registered self-employed businesses and landlords with an accounting period starting after April 2018. All VAT-registered businesses will be brought in from April 2019 and companies from April 2020.
In ICAEW’s view it would be less challenging to start with the largest businesses (which will already have digital records) and work down rather than with the very smallest and work up.
Businesses will welcome having access to more information about their tax affairs through their Digital Tax Accounts, but the transition to digital should be voluntary, based on a clear business case, rather than compulsory.
Compelling research is needed on access to and appetite for digital amongst the self-employed and small business community where we are concerned that most of the administrative burden of change will fall. We have already commissioned research to be carried out by an independent third party.
Sharing with the taxpayer income details already held by HMRC and other government departments, makes sense. For many people with simple tax affairs all they will have to do is check the information on their digital tax account and confirm it is right. This is a welcome simplification, but will be a task which many individuals who are not currently in self assessment, do not do at the moment.
For the future there is scope to collate even more information, for example from stockbroker’s end of year reports, banks and credit rating agencies and we expect consultation in spring 2016 on how this will work.
We do not forget too that:
(see Making Tax Digital, published December 2015)