The cutting edge

KEY POINTS

• With the Making Tax Digital project, HMRC aims to be the most digitally advanced tax authority in the world.
• The Digital Advisory Group aims to represent views from small businesses directly and their agents.
• The Administrative Burdens Advisory Board is keen to understand how Making Tax Digital will add to or reduce business burdens.
• A summary of the six consultation documents.
• Practitioners should speak and to be heard.

The ink has been dry on the Making Tax Digital (MTD) consultation papers for some months but, unfortunately, this project has been caught up in various political snares. Not the least of these was a change of the team at the top where, most pertinently, David Gauke, the minister for HMRC, has been promoted and replaced by Jane Ellison. MTD was the outgoing Financial Secretary to the Treasury’s baby and the handover has taken a little while, but it is important for the new minister to appreciate the scale and scope of the project.

And what a project! To be the most digitally advanced tax authority in the world. To accept third-party data and allocate it to taxpayer accounts so that anyone can see a snapshot of their tax position (for almost any tax) at any time. To provide tailored support and help for taxpayers through that same digital tax account, directing them to webinars and news that may be relevant to them and their businesses.

Although advisers and accountants will be keen to examine the small print in the consultation documents (and as a profession we are, of course, very affected by the small print) this is an opportunity, just for a moment, to consider a much broader view. MTD sits within a huge transformation process for HMRC and will affect what departmental staff do and how they do it (and possibly where they do it) across the board. It will also affect what we and our clients do and how we do it. This will include replacing computer systems that are not fit for purpose, rather than trying to nurse them through more changes, and designing systems and processes with digital at the forefront. It is an exciting and challenging proposition. Although, as someone said to me recently, it takes a very special sort of person to get excited about this.

Down to the detail

So, to the detail, and what my group, the Digital Advisory Group (DAG), hopes to achieve in the next few months.

First, a little background. Around the time of the original announcement in December 2015, I was somewhat distracted by personal matters and looked forward to settling down over Christmas with the bulk of the information released at the Autumn Statement and on legislation day. As a result, I was a little slow to catch up with the bombshell announcement – that all businesses were to be required to keep digital accounting records and update HMRC quarterly with data. My reaction was probably similar to most readers of this article and I entered a short period of complete denial. This could not possibly happen. It is a very un-British thing. Not one of my own clients would ever be able to deliver what was expected of them. Brief conversations over the next few days hardened my view. Phrases like ‘Everyone has a smartphone these days’ drew my immediate response as did ‘That doesn’t mean they know how to use it’ and other gems drawn from my (long) experience. However, the slightly geeky part of me had already been enthused by a project originally called Making Tax Easier (MTE), which envisaged much of what MTD proposed but without mandation. I will leave readers to fill the gap as far as what I then thought MTD stood for.

As my conversations with colleagues both in the profession and at HMRC developed over the next few weeks, in exasperation I pointed out that HMRC clearly had little understanding of the small business sector. Further, it needed a ‘reality check’ from small businesses directly and from agents who service that sector. This must have sounded very much like a volunteering statement to the person on the other end of the telephone. My ‘offer’ was accepted with alacrity and the Digital Advisory Group was born. Terms of reference and membership were agreed and, after a slow start, we gradually started to involve ourselves in looking at early drafts of the consultation documents and making constructive suggestions.

To sum up our objectives, we are working with HMRC to help the tax authority understand the needs of small businesses and the agents who serve them. Some of us are strongly opposed to mandation, but we take the view that this should not prevent us working constructively with HMRC to help design a system that works effectively for all stakeholders and that recognises all their needs.

Speak and be heard

Now we need to enable and encourage as many of those who will be most directly and, I might say, dramatically affected by the proposals to contribute to the consultation. To speak and to be heard. The amount of material is a little overwhelming but we can help firms and businesses focus on the main issues that will affect them (and their clients), understand the proposals in context and contribute to the process of building a tax administration system that can benefit us all – as agents, as businesses and as taxpayers who ultimately foot the bill for running the tax system.

Our first contribution since the launch of the consultation documents is to develop a short presentation that small firms can use in house to discuss the proposals. It looks at the key issues for the professional firm and, with speaker notes, relates these back to the detail in the consultation documents. It is accompanied by a template for responses to make the whole process as easy as possible. I would encourage all firms to consider making their own response and to provide as many real-life examples as they can. If clients are willing to respond too, setting out their own views, that can only make the consultation results stronger.

The presentation and notes referred to above are attached to the website version of this article.

Our next step will be to produce a similar tool for businesses. This might be used by firms at a client presentation, but it will also be used by HMRC – and as many trade bodies as we can rope in – to present sessions to businesses directly and gather views.

One of the most difficult but important areas is to gather data about what HMRC terms the ‘impacts’ of the changes. An HMRC team has done some work on quantifying a cost saving for businesses, using the ‘standard cost model’, which is used for most impact assessments, including that for RTI. This identifies the time taken to perform particular tasks and allocates a cost to these. By identifying time savings, HMRC can isolate a cost saving. But it is HMRC’s lack of understanding of how businesses really operate that sometimes leads to results that most of us regard as, at least, highly suspect. These numbers often don’t ‘feel right’. Recognising this, HMRC has taken great pains to ask businesses about the impact these changes will have on them. These will be both transitional – for example, acquiring hardware and learning about the new systems – and ongoing, such as additional software costs or staff time. The government has already indicated that additional help will be available for small businesses – up to and not excluding actual cash payments or extra tax relief.

Respondents to the consultation are therefore encouraged to make suggestions on what they feel is the best support for smaller businesses. But establishing and valuing these impacts is difficult for businesses when they do not know, in full, what will be expected of them. So, in a future article, I shall write a little about what DAG will be doing to look at that in more detail.

I should add that the Administrative Burdens Advisory Board (ABAB), which is an HMRC challenge board and on which I sit as a practitioner dealing with smaller businesses, is keen to understand how MTD will add to or reduce business burdens. Our job will be to challenge HMRC on this.

Down to the details

Finally, the detailed proposals. This is just a taster to tempt Taxation readers to look at the consultations in more depth. There are six consultation documents:

• A – Bringing business tax into the digital age.
• B – Simplifying tax for unincorporated businesses.
• C – Cash basis for unincorporated landlords.
• D – Voluntary pay as you go.
• E – Tax administration.
• F – Transforming the tax system through better use of 
  third-party information.

Some of these condocs overlap slightly, but here is the gist. Most of what follows is open to consultation and there is little that should be regarded as ‘set in stone’.

A – Into the digital age

This is the main consultation document, running to 78 pages, covering the main structure of digital tax for businesses, including the requirement to keep records digitally and update HMRC at least quarterly (with a time limit of one month).

Some help is provided for the smallest businesses in the following terms:

• Businesses with a turnover below £10,000 and/or landlords with gross rents of less than £10,000 will be exempt from the requirement to keep digital records and update HMRC quarterly. However, if a small business owner also has rental income the limit remains £10,000 in total. This turnover limit is open to consultation. This is in addition to the announcement in March this year that those with self-employed income or rental which is a secondary source (such as employees with a buy-to-let property) with gross income of no more than £10,000 would be exempt from these requirements.
• The next rank of businesses (with turnover of in excess of £10,000, but up to an unspecified limit) will have an extra year to join digital record keeping and quarterly updating. The start date for the main migration is April 2018, with the first updates falling in July 2018.
• Businesses that cannot use digital technology (a definition carried across from the current VAT rules where online returns have been mandatory for a while) will be exempt from the requirements, although they may still have to update HMRC quarterly by other means.
• Charities and community amateur sports clubs will be exempt from the requirement.

In general, the design approach is to allow as much choice for businesses as possible, within minimum parameters for income and expense headings aligned to the current analysis in the tax return. This will allow businesses to continue to use the format and approach of accounting systems that they have already. Adjusting for items such as accruals, prepayments and stock and the tax adjustments such as disallowances and capital allowances can be made periodically or in a separate year end update, for which nine months will be allowed. Record keeping and quarterly updating will be supported by ‘prompts and nudges’ to pick up potential errors at an early stage.

Partnership income and expenditure and figures for jointly-owned rental property would be submitted as a single periodic update with the relevant partners’ or joint owners’ profit or loss share being displayed on their respective digital tax accounts.

B – Unincorporated businesses

This considers various simplifications to make the whole accounting and reporting process easier for businesses. Four main ideas are advanced:

• Increasing the entry threshold for the cash basis – suggestions are invited for a new entry turnover limit and a new exit limit.
• Reforming (removing?) the basis period rules.
• Simplifying the reporting requirements for those not using the cash basis by allowing accruals, prepayments, stock and adjustments for long-term contracts (spanning up to 12 months) to be excluded from annual accounts.
• Simplifying the capital/revenue divide under the cash basis.

There are some interesting suggestions here, and the basis period reform aspect is a clear simplification for all. Overlap profits would be abolished (but existing businesses would be able to deduct their overlap on cessation), and a taxpayer would pay tax on the accounting periods (of variable length but a maximum of 12 months) ending in the tax year. Illustrations include a music teacher who draws up accounts for each half term, and a universal credit claimant who makes up monthly accounts to the date of his UC claim date.

C – Unincorporated landlords

This proposes introducing a cash basis for landlords without a limit on gross rents – although this is a consultation question.

Amendments to the cash basis rules would allow interest to qualify without application of the £500 limit and the related mixed purpose interest rule. Interest would be allowed according to the prevailing rules for landlords (including the planned restriction starting in 2017).

The consultation also considers the subject of tenant deposits. In strict terms, the cash basis would regard these as income when received and expenditure when repaid, but the consultation offers the possibility of these being ‘ring-fenced’ until the end of each tenancy.

D – Voluntary pay as you go

This consultation sets out the options for taxpayers to make payments towards their eventual tax liability, aided by information on their digital tax account. This option is something HMRC has been asked for during research and is keen to provide, not least because it makes it more likely that tax liabilities will be met in full on the due date.

It is not proposed that the due dates for tax and payments on account will alter. This proposal also looks at all of a taxpayer’s liabilities together, such as VAT, PAYE and income tax on profits. There are some detailed examples in the consultation document.

E – Tax administration

In principle, powers (and safeguards) such as enquiry and information powers, determinations, discovery assessments and corrections to ‘returns’ will be carried across into the new regime with only the necessary changes to articulate with the effective abolition of the tax return. Compliance powers will not, in any event, be directed at quarterly updates to allow ‘year end’ corrections, and a penalty-free soft landing of 12 months is proposed.

For late submission and late payment sanctions, some new proposals are advanced, based on a discussion paper on penalties issued in early 2015. Non-deliberate late submission could move to a more flexible points-based system, imposing a penalty when a specified level of points have been reached through multiple failures across all tax obligations. Again, the suggestion is that this will be suspended for the first 12 months that a taxpayer is within the new regime to allow time to adjust to the new requirements.

Late payment sanctions could move to a ‘penalty interest’ model (as well as the normal interest charge) which could escalate as the default lengthens. An alternative is to align all late payment penalties across tax regimes.

F – Third-party information

The benefits of these proposals are clear: no taxpayer would ever be required to tell HMRC about information already in the tax authority’s possession. Thus, as early as April 2017, details of pay, pensions and benefits reported by employers and pension providers would be shown on the individual tax account.

From April 2018, this would be supplemented by interest from banks and building societies. Beyond that, HMRC is considering additional powers to require information from third parties – the most obvious of which is about dividends. Also mentioned is rent paid to landlords (presumably by letting agents). Much of the consultation is directed at third parties and the ease and frequency of providing information.

Conclusion

So there you have it – a very different looking tax system and indeed the end of the tax return. I shall be working with HMRC on this for as long as it takes and I certainly expect to be involved through to 2020. Might I then heave a sigh of relief or reflect with sadness on opportunities missed? Well, I respectfully suggest that some of that is up to you, dear reader.

Issue: 4564 / Categories: Comment & Analysis