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Key points
- The government should not overload HMRC with projects to the detriment of it being able to deal with its day-to-day work.
- The Taxes Management Act should be consolidated and brought into line with the digital age.
- Making tax digital for VAT appears to be working well, but how sure is HMRC that taxpayers are complying with digital recordkeeping requirements?
- There must be proper trials before MTD for income tax is mandated.
- The role of agents should not be overlooked.
- Taxpayers’ responsibility for their own affairs in the gig economy and reliance on pre-populated returns.
Many readers will have seen the Institute of Chartered Accountants of Scotland (ICAS) report on the future of tax administration. It occasioned much interest in theTaxation office so Andrew Hubbard and Allison Plager arranged a follow-up conversation with the report’s principal authors, Charlotte Barbour and Susan Cattell, to discuss some of the key themes and to share some thoughts on the main areas for change.
Rather than identify individual speakers Taxation’s contributions are in italics and ICAS’s in normal type.
Let’s start with an easy question. What prompted you to produce this report?
There were a couple of reasons. The first was that we continue to receive a lot of, mainly negative, feedback from our members about the current state of the tax system – both in terms of the way that it is administered by HMRC but also about its sheer complexity. We wanted to give a voice to those concerns. But secondly, as a public interest body, we very much welcome the current debate on the future shape of the tax administration framework and we wanted to contribute to that. We will be responding to the various consultations in the normal way, but we also wanted to put our own views forward without being constrained by predetermined questions.
HMRC’s response to the pandemic
So what is the ICAS view of HMRC’s current performance? Are your members right to be concerned?
Yes they are. The day-to-day experience of members in trying to deal with HMRC on behalf of their clients is very mixed. There is plenty of good service out there, but too many examples of situations where it is very difficult to get things done. We are frequently told that something which in the past would have taken a single letter or phone call to sort out now takes far too long and goes through many iterations before it can get resolved. Often it is the fairly routine things which create the frustration.
Is that being fair to HMRC: after all it has had a huge amount on its plate recently?
We would be the first to acknowledge the pressures on HMRC both from Brexit and then Covid-19. Either one of them would have been enough to knock any department off course – both together were a formidable challenge. There is no doubt that HMRC responded very well to the Covid-19 crisis and managed to get money out to people efficiently at a speed which we, and I suspect even they, were surprised at. But this comes at a cost, because as we know HMRC had to put other projects on hold, including the single tax account, which might well have been a real step forward in simplifying the way that the system operates.
One of our fears is that the government will use the success HMRC has had with the Covid-19 support services to justify giving it more and more to do without resourcing it properly to do what it needs to at the moment, let alone deal with these extra demands. Overload was already evident before the pandemic, with HMRC being given a role in areas which are not pure tax, for example, the high income child benefit charge, tax credits, student loans and money laundering.
Is the TMA fit for purpose?
Let’s look at some specific areas. One of your concerns, which we at Taxation certainly share, is the Taxes Management Act, which is now well over 50 years old, and which has its roots in even older legislation. We know that this is on HMRC’s agenda, so what would you like to see happen?
In terms of the TMA there are at least three stages. The first would be to consolidate everything into one act. The 1970 Act had a coherent structure, and it was possible to follow all of the stages in the process – from notification of liability through to appeals – in a logical order. Now everything is scattered all over the place, in multiple different acts and it is virtually impossible to see how it all fits together.
We agree with that – trying, for example, to establish exactly which penalty provisions apply to each tax is now a nightmare.
At a minimum we need a full consolidation. The second stage would be to take the opportunity to rewrite using modern language and clearer signposting. The Tax Law Rewrite project stopped before it got to the TMA. We think that this is a pity and would have liked to have seen the administrative law be put through the same process. But we would not want to see that as an end in itself. The third stage is a wholesale rethink of the way that the law is structured. We all know that the TMA dates from a period when everything was done manually: it does not cope with the reality that so much is now done by computer. The new TMA needs to be able to deal with an automated system which for many taxpayers will be based around the single taxpayer account or making tax digital (MTD) returns.
Pace of tax digitisation
As you have mentioned MTD let’s get straight into that. What is ICAS’s view of the role that digitisation has to play in the future of the tax system?
We say in the report that we broadly support MTD and that is certainly our position. As more and more of our everyday life is conducted though digital means it would be very odd if HMRC were not looking to digitise tax administration. We have worked, and continue to work with, HMRC on the digital journey. But we do have concerns about the pace of development.
How do you think that MTD for VAT has gone so far? We were interested in your comment in the report where you said ‘some software encourages or allows businesses to adopt an incorrect approach’. That seems quite worrying.
On the whole the introduction of MTD for VAT went more smoothly than many people were expecting. The system did not crash and businesses were able to file their returns. But we do have concerns that, at the moment, HMRC is not seeing the whole picture. We don’t know to what extent people are actually complying with the digital record keeping requirements and we suspect it may be some time before we can really evaluate the success of MTD for VAT.
As far as problems with the software are concerned we have had a number of examples reported to us. Scanning software may not be picking up the right breakdown of items – so for instance all of the purchases at a supermarket are being tagged as fuel. We have also heard of cases where the software has allowed the taxpayer to put wages and salaries into the system in a way which incorrectly generates an input tax deduction.
Is that a reason to blame HMRC – after all this is commercial software we are talking about?
We take that point completely. But what else are taxpayers expected to do? HMRC is not providing software and therefore people have to use a commercial alternative. HMRC lists many providers on its website, all of whose software will file the VAT return but does not endorse any particular products. The taxpayer has to assess whether a package is suitable for their needs – and many probably lack the expertise to do this effectively. When we move to MTD for income tax these problems are bound to reappear in much greater volume.
So what would you like to happen to MTD for income tax?
First, we think that it is essential that there is a proper trial period which includes at a minimum one complete tax return cycle and preferably two. We acknowledge that there is a pilot programme in place but this is on a very small scale and open to a limited range of taxpayers. There should be a full-scale pilot open to all. If MTD for income tax is indeed the real time and efficiency saver for small businesses that HMRC says that it is, then people will want to see the benefits for themselves and get signed up as soon as possible. But early mandation of a system which has not been properly trialled risks alienating a whole swathe of the population.
Second, we think that more work needs to be done on simplifying the tax system for at least the smallest businesses. The recent announcement on reform of basis periods is probably a step in the right direction here, but we feel very uncomfortable that this is being introduced at the same time as MTD rather than being sorted out before MTD is introduced. We want MTD to work – we think that it is the right direction for the tax system to go in, but there is just too much to do in a short time, particularly as businesses struggle to re-establish themselves after Covid-19. Getting it right and getting taxpayer support is more important than getting it done quickly.
Keep tax agents in the picture
The ICAS report makes some strong points about the role of agents in the tax system. The first sentence in the relevant section is ‘The UK tax system would not function effectively without agents’. Is there a tension here? If the simplifications that you want in the tax system and an effective MTD system both come to pass isn’t the logic that there will be a much-reduced role for agents?
We do not see a contradiction here at all. We would never advocate a system which depended on somebody having to use an agent. Taxpayers who can do so should always be able to file their own returns. But the reality is that many people will not want to do this, either through a lack of time or, more likely, for fear of getting things wrong. So while we do not advocate systems being designed which makes the use of agents compulsory neither do we think that it is right that they should be designed in a way which makes it difficult or impossible for agents to get access.
Agents were cut out of the claims process for the SEISS. We understand that this was simply because there was not enough time to include agents given the need to get the system up and running, but we would be very concerned if this led to HMRC making similar decisions in the future. Of course, if HMRC always included agent access as a default, it would not be so difficult to add agent access when something like self-employment income support scheme (SEISS) came along. We have no doubt that HMRC would find it almost impossible to administer the tax system without the work that agents do day in and day out.
One of the things which interest us, and I know that it does you as well, is the extent to which a citizen should have responsibility for their own tax affairs and the knowledge to understand how their tax is calculated. In reality (though perhaps not in strict law) PAYE taxpayers can pass the whole responsibility to their employer and do not need to get involved at all, whereas the self-employed need to take complete responsibility and, if things go wrong, they have to face the consequences. Where do you stand on this?
This is always a difficult issue. In a democratic society, citizens do have a responsibility for their own taxes – both how much they pay and how the money is spent. In reality however it is incredibly difficult to find the right balance. In Scotland we have had some very interesting experiments with a citizens’ assembly where there have been real attempts to engage the public on some of these issues. The evidence from this is that where there is a greater understanding of how the tax system works the more likely it is that people will engage with the system and be willing to pay the proper amount of tax. But this assembly has, of course, only touched a tiny proportion of the population.
This question of responsibility will become more and more of an issue as tax returns are increasingly pre-populated with data. To what extent should a taxpayer be able to rely on that data? If it is wrong should they take the consequences or should those lie with the data provider or even HMRC? How much checking should a taxpayer be expected to do? It is straightforward for people with one full-time job and a single bank account, but so many people are not in that position anymore. In the gig economy keeping track of bits of work here and there is not straightforward, even for technically savvy individuals. If somebody has 16 jobs during the year but the return is pre-populated with details of only 15 of them, should the taxpayer be penalised for not spotting that information about the 16th is missing? These are big issues and so far, have hardly been touched on, but we see them as questions which will have to be addressed properly if we are to make digitalisation work; they should also be taken into account in any rewrite of the TMA.
Importance of working together
We have covered a lot of ground in this discussion and there is plenty more we could talk about. What thoughts do you want to leave our readers with?
Thanks for the opportunity to talk to you – it has been interesting to share ideas and to be challenged on our thinking. I would say this: we have not written this report as an exercise in HMRC bashing. We do not doubt the good faith of the organisation and we have the highest respect for many of the people working within HMRC at all levels. The department has a difficult job to do – after all I suspect that not many of our members or your readers would actually want to take on the responsibility for everything that HMRC has to do these days.
The department has come out of Covid with its overall reputation enhanced and has a confidence which we have not seen for some time. Its ten-year plan for the transformation of the way that the tax system is administered is ambitious and will bring up challenges which we cannot even contemplate at the moment. After all, ten years ago nobody had made a Zoom call whereas now it’s hard to image a world without Zoom or Teams. So any ten-year plan will always be behind the technology curve and will need to be adapted to accommodate new developments.
The role of bodies like ICAS is to work with, not against HMRC, but to insist on reality checks and to ask the difficult questions. The one thing more than anything else we would stress to HMRC is that policy and process must always go hand in hand. We have had too many examples where new policy initiatives have been introduced with what appears to be no thought as to how they would work in practice. That wastes everybody’s time and is enormously destructive of people’s confidence in the tax system.
Many thanks for your time. This whole question of how the tax system should be administered is something that we will keep turning to time and time again in the magazine. As ever we would welcome readers’ feedback. After all, it will be our readers (including, let’s not forget, those in HMRC) who will be at the sharp end of all of this.
