Looking ahead to 2019
Frank Haskew, head of the ICAEW Tax Faculty, looks back over the events of 2018 – Making Tax Digital, off-payroll working rules for the private sector, the role of HMRC – and what might happen in post-Brexit Britain in 2019
The final editorial of the year is traditionally a time for looking back over the events of the past year and making a few predictions about what might happen in the year ahead. Looking back is the easy bit; looking ahead is rather harder.
Usually we have a pretty good idea about what might be in store for the coming year but, this time around, we do not have that luxury. In fact, predicting what the future will look like, as things stand today, is probably a task reserved only for the most experienced of clairvoyants!
Overshadowing everything is what the UK will look like post-Brexit. The trouble is that, even now, the only things we know for sure are that the UK is due to leave the EU on 29 March 2019 and that we are leaving the single market and the customs union. But we do not yet know on what terms we will be leaving or what relationship the UK will in future have with the remaining EU countries.
We are on the cusp of a once in a generation shift in the UK’s position in the world, but it will probably take a generation for its consequences to become clear. What lessons can we learn from the past to help inform what the future might look like? That is not an easy one to answer as we do not have a suitable precedent to work from. Future historians will no doubt study it with intense interest, but living through it will present numerous challenges as well as potential opportunities.
The lack of certainty makes life difficult for businesses and their advisers. The one consistent message from our members is that businesses want certainty to help them plan and grow. But how do you plan when there is so much uncertainty and time is running short? Businesses that sell and buy from the EU need to have contingency plans in place that are sufficiently flexible to cope with a variety of possible outcomes.
HMRC has estimated that 145,000 VAT-registered businesses only trade within the EU. If they continue to do so, they must (subject to any agreements to the contrary) apply customs procedures and duties to exports and imports. Businesses should plan on a worst-case basis, but we need to know soon what rates of duties will apply to imports to the UK and exports to EU countries.
Making Tax Digital
In a normal year all attention would be focused on the upcoming changes to Making Tax Digital (MTD). It is easy to see why: from 1 April 2019 all VAT-registered businesses will be required to submit VAT returns using functionally compatible software and also to maintain their records digitally. Out goes the old nine-box VAT return submitted through the government gateway and in comes shiny new API-enabled software that will apparently help to reduce errors and make life for businesses easier. Software providers are starting to roll out new products but many businesses will be using spreadsheets to help prepare VAT returns: how much longer will this be allowed to continue?
More problematic for many businesses will be the need to maintain records digitally. It appears that many businesses are not yet ready for this momentous change. In a survey we undertook over the summer, 42% of businesses had no awareness of the impending changes MTD will bring and about a quarter are still keeping only manual records. While not all these businesses will be required to apply the new rules, for example because they are voluntarily registered for VAT, the survey results suggest that for many VAT-registered businesses there is still a mountain to climb in order to implement MTD successfully. Our members will be at the forefront of helping them make the transition.
Off-payroll working and contractor loans
With the introduction of new off-payroll working rules for the public sector in April 2017, it was only a matter of time before these rules would be extended to those in the private sector. There was considerable political pressure to do this, given the shortcomings of the current IR35 regime, so it was no surprise when the chancellor announced it in his 2018 Budget. However, it was good to see that the chancellor had listened to concerns about the timetable for extending the measure and therefore announced that it would start on 6 April 2020 rather than 2019 as many had feared.
The extra year will be welcomed by businesses that need time to make strategic decisions about the future of their off-payroll workforce and implement any necessary systems changes. This could be a tall order for many businesses, even without any other changes to contend with, but layering it on top of MTD for VAT and the tax implications of Brexit could have been too much for many.
In a further softening of the measure, the Chancellor also announced that the extension of the IR35 rules will not apply to small businesses, with a further consultation paper due shortly and draft legislation to follow in the summer of 2019. While this will be welcome news for many small businesses, it perpetuates a major fault line in the UK tax system. We desperately need a holistic view of the tax and national insurance treatment of the world of work – and whatever happened to the other recommendations in the Taylor review?
Another potential storm that could hit in April 2019 is the new charge on loans made to contractors since 6 April 1999 and still outstanding on 5 April 2019. While abuse in this area needed to be tackled, the loan charge is a potentially draconian measure that even HMRC admits may result in some contractors going bankrupt. We have seen already that this measure has great potential to backfire on HMRC, especially as it will arise at a time of great upheaval and stress within the tax system.
How is HMRC coping?
A recurring theme of the last year or more is HMRC’s capacity to operate an effective and efficient tax system. In evidence to the Public Accounts and Treasury Committees, the CEO of HMRC Jon Thomson admitted that HMRC had the capacity to implement MTD and its own reorganisation into 13 regional offices, but it could not do these while also implementing Brexit. HMRC undertook some reprioritisation of its activities, which included deferring parts of its MTD programme, but it seems to be struggling to meet the many challenges it has been set.
As Brexit and MTD activities reach a critical juncture, it looks like all hands in HMRC are manning those particular pumps, with the result that other areas of HMRC’s business appear to be suffering. The Public Accounts Committee has questioned whether HMRC’s targets for customer service are sufficiently stretching and, judging from our inbox, evidence from members would suggest that HMRC’s basic telephone and post services have been slipping. This is disappointing and needs to be addressed if HMRC is not to be seen as part of the problem.
But, if it is a truly digital organisation, why are post and telephone still the main measures by which HMRC is judged? Why do we still not have a secure email service that taxpayers and agents can use to help improve efficiency?
Looking ahead to… what?
So, what is likely to happen? We know that with the introduction of MTD and potentially a number of VAT and customs duty changes to contend with, April 2019 will be a watershed moment in UK tax history. It is possible that the impact of Brexit may be less dramatic in the short term, because existing arrangements will largely continue for a transitional period, but at this stage we cannot tell. Earlier this year, it looked as though MTD for VAT might be deferred if there was no Brexit deal but the government has now made it clear that MTD will start in April 2019 come what may. Whatever happens, rest assured that the Tax Faculty will be here to help and guide you through the challenges ahead.
Finally, and on a happier note, I wish all our members a Happy Christmas and New Year. Many thanks for choosing to support us over the past year and we hope to remain of service to you in 2019.
About the author
Frank Haskew is head of the ICAEW Tax Faculty