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Key points
- The government’s roadmap for making tax digital.
- A look back at the digitalisation of tax administration.
- Landlords and unincorporated businesses will file quarterly returns from April 2023.
- Bank and accounting software is becoming more common.
- The impact of coronavirus on the tax system.
- The approach should be incremental change delivered after consultation.
- Tax payment should combine with real time tax reporting.
- Working remotely may make tax practitioners rethink their use of digital channels.
In its report Building a trusted modern tax administration system (tinyurl.com/yye9hb2q), published on 21 July, the government set out a roadmap for making tax digital (MTD) in the context of a broader, ten-year plan to modernise tax administration and build a tax system fit for the challenges and opportunities of the 21st century. The two main elements of the plan are digital delivery and HMRC powers. The Covid-19 pandemic has, unsurprisingly, had an impact on the government’s thinking. The strategy commits to an approach that is focused, collaborative and transparent. Such an approach is vital if all stakeholders – businesses, agents and HMRC – are to feel that it will deliver something tangible for them.
Readers will by now be aware of the main announcements on MTD contained in the report. Before I review these and the other proposals in more detail, I would like to rewind 23 years to look at what has happened in terms of digitalisation to date in order to put the proposals into a broader context (if you just want to focus on the future, skip to ‘play’).
Rewind to first track
Digitalisation of UK tax administration has seen both revolutionary and evolutionary change. Revolutionary change has frequently – but not always – been triggered by HMRC initiatives, while evolutionary change has taken place as technology, software and apps have increased in functionality and as digital platforms have become more familiar through online banking, shopping and the growth of social media and digital information channels.
Let’s wind the clock back to St George’s day 1997 when my old firm, AC Mole & Sons, filed the UK’s first digital personal tax return to launch the electronic lodgement system (ELS). 1997 was a year of radical change: we were moving from the preceding year basis of assessment to the current year basis and from assessment to self assessment; many practitioners were looking at tax software for the first time and the software industry was migrating from DOS to Windows. Each of those changes was revolutionary on its own and looking back it is extraordinary to think that they were happening simultaneously. While some practitioners resisted the move to digital on grounds of cost, reliability or security, those who embraced the new technology generally found that it enabled them to deliver a better, more proactive service to clients while reducing costs and giving staff more interesting work. Two decades on, e-filing of personal tax returns is mainstream. The announcement of the next steps in MTD combined with the changes Covid-19 has forced on society, businesses and agents places us firmly in another such time of radical, multi-faceted change.
Track 2
After the digitalisation of personal tax returns, the next big step in electronic compliance involved payroll. Large employers were required to submit their end-of-year PAYE returns electronically and smaller employers were encouraged to do so through a system of incentive payments (a largesse we are unlikely to ever see repeated). This prompted the government to ask Lord Carter of Coles to review the potential for digitalisation of HMRC’s services more generally. He recommended that VAT and corporation tax returns should be filed electronically, triggering a further quantum shift to e-filing and the use of iXBRL (which presented a major challenge to the software industry). He also highlighted the importance of systems having adequate capacity and being fully tested before launch, the so-called Carter principle.
The next big change was real time information (RTI). The post implementation review (tinyurl.com/sy5evp6) highlighted an issue that must be fully taken on board if the next stages of MTD are to be delivered effectively: the needs of all stakeholders, including agents, should be designed in from the very start. It is still hard to believe that a system could have been designed which gave the employer, the HMRC employer helpline and HMRC debt management teams different views of the same data, while agents had no view at all. HMRC helplines struggled to cope. Much wasted time could have been avoided if all parties had been given the same view from the start and many calls to HMRC’s helpline avoided. All stakeholders must be given the tools they need to play their particular part in delivering better tax administration and must be involved in the design of those tools.
And then – we are nearly back in the present – in the winter of 2015 came the announcement of mandatory MTD. If there is a lesson to learn from the past five years it is again that we proceed faster if we work together as genuine partners in design and delivery. Businesses and their advisers know best what they need from software and apps. Tax information should (and must) be a reliable output and, as we have seen, it can be a driver of change, but it should not be the principal driving force of design. Digital technology has a huge amount still to deliver for better business administration, efficiency and productivity as well as for better tax administration. Working together is the only way to ensure that MTD-compliant software delivers what businesses and agents need, as well as what HMRC needs.
Play
The report released on 21 July sets out the next steps for MTD. Most VAT-registered businesses with turnover in excess of the VAT threshold were, of course, mandated to use MTD for VAT from April 2019. Since then, more than 1.4 million businesses have registered for MTD for VAT and over six million returns have been filed through the system. We now know that MTD for VAT will be extended to virtually all VAT registered businesses, irrespective of turnover, from April 2022. According to HMRC, 30% of businesses within this currently un-mandated group have in fact already joined the MTD for VAT programme voluntarily.
Landlords and unincorporated businesses with rent or turnover above £10,000 will be mandated to file quarterly returns for income tax and National Insurance under MTD for business from April 2023. I have no doubt that the concerns which led to the deferral of MTD for business will be voiced again and, given the extent to which they have slowed progress to date, I was surprised to see the return of the £10,000 figure instead of the VAT threshold. Small businesses need to see a reduction in business burdens, especially now. Costs are not just transitional but ongoing – and on top of the costs of RTI, auto-enrolment and the many other regulatory obligations small businesses have to cope with. Based on my experience, the cost estimates in the report look low.
Early engagement will be needed on the technical and computational issues set out in the consultation documents issued in the summer of 2016 which need to be fully resolved long before April 2023 (see tinyurl.com/jvxcwjq). How iXBRL fits with MTD for corporation tax will need to be considered (and the extension of MTD to corporation tax will be consulted on later in the year). There must also be a transparent assessment of how MTD is delivering against its original objectives: to reduce errors, increase the accuracy of records, increase tax yield and reduce business burdens.
The bridge
The report acknowledges that bridging software has enabled many businesses to comply with MTD and gives no hint that the ability to use it will be withdrawn. HMRC does, however, anticipate that increasing numbers of businesses will choose to migrate to complete MTD for VAT software solutions. It also directly and positively addresses the point I made earlier when looking at the lessons learned from RTI, embracing a ‘vision for agents to be able to see and do what their clients can and designing in agent access from the outset’.
But MTD is not the only thing driving digitalisation: there is evolutionary change too. The software market has evolved significantly since the announcement of MTD in 2015. Links between bank accounts and accounting software have become more common and the reliability and accuracy of apps that capture and categorise purchase and payment information has improved greatly (though these are still not perfect). Practitioners did the heavy lifting in informing, training and supporting clients through the transition to MTD for VAT, creating a solid foundation for the next phase.
Covid-19 has added a new and powerful catalyst for change, perhaps more powerful than MTD. The pandemic has prompted many – probably most – agents to rethink their digital services for clients and many businesses to rethink their attitudes to digital technology. Zoom meetings are now routine and the advantages of cloud-based software have become much clearer. The ability to ‘virtually’ look over a client’s shoulder makes the difference between offering a real-time, proactive service and a reactive, time-lagged service. There has been a quantum shift to online channels and to electronic payments. The world of business and accountancy has changed as a consequence and it will continue to change.
Live performance
At the very heart of MTD is a clear ambition which was set out in 2015: ‘The government is changing the tax system so that it operates much more closely to real time.’ The July 2020 report repeats that ambition: ‘At the core of an effective and modern tax system is real time information.’ It is easy to see why this interests HMRC: bringing record keeping closer to real time is likely to increase accuracy (though not necessarily tax yield if what it captures is more expenses). That is what will drive the error reduction MTD seeks to deliver. It also offers HMRC the potential to make targeted interventions based on real time risk assessments. More accurate records must be better for everyone and being able to produce accurate interim figures facilitates better decision making and improved advice. Covid-19 has reinforced the value of accurate, up-to-date information, particularly when it relates to cash flow. Using cloud-based software, agents and clients can share that information and build better advice around it.
The analogue experience
Some of course will still be perfectly content with manual records. In my time, I have seen as many excellent sets of manual records as I have seen error-ridden sets of computer records. Digitalisation is not a magic wand. I still find it hard to accept that those who have good manual records and who struggle with IT should be forced to go digital, but I do think that we should be proactive in arguing the benefits of digital to as many businesses as possible. While writing this piece I had the lock on the back door changed; the locksmith generated and emailed me the invoice before he left and I had paid it online within minutes: that for me is where digital really works for small businesses, freeing time, assisting cash flow and getting the record-keeping chore done straight away – but I accept that not everyone wants to work that way.
Covid-19 has affected HMRC’s thinking. The coronavirus job retention scheme (CJRS) system was designed and launched in incredibly short order. Considerable credit is due for that. The flow of real time information from employers through RTI enabled HMRC to draw on data from March 2020 to support the delivery of CJRS. The self-employed income support scheme (SEISS) was also launched quickly and at a pace that would normally be unthinkable. The online system did not, however, enable agents to make claims for clients and before launch it took HMRC eight weeks to data-cleanse. The April 2019 data cut off left many self-employed traders disadvantaged. The report reflects on this and concludes that such a situation must be catered for in future. It notes that if businesses had been reporting quarterly for income tax under MTD, a further three full quarters’ information would have been available, allowing government to assist at least some of the excluded businesses and to have based payments on more up-to-date information. Six months ago, few would have considered it likely that HMRC would need to use data in such a way. This kind of agility will need to become the norm: significant design features needed now may not be needed – or needed in a different way or on a different scale – in two, three or four (let alone ten) years’ time.
The government now views HMRC as ‘an organisation central to our UK national resilience and crisis response, as well as discharging their traditional role as a tax authority’ which suggests that the department’s remit will widen.
Fast forward
Sensibly, the plan does not advocate a fast forward approach, but favours incremental change delivered consultatively, with HMRC introducing ‘increasingly integrated processes drawing on information from business systems and validated third parties’.
The report draws comparisons with the experience of other tax authorities (Australia, Denmark, Finland and New Zealand) in introducing digitalisation. I would urge HMRC to look even further into what is being achieved elsewhere and a good starting point is the ICAEW paper Digitalisation of Tax: International Perspectives which looks at 12 countries (tinyurl.com/y5dzg5j4). One thing that stands out in the ICAEW report is the use of pre-population (which Denmark introduced as long ago as 1988) to simplify the tax return process for individuals. HMRC might also look at ideas such as e-invoicing, as Brazil has done, and will need to keep a weather eye on the use of blockchain by businesses. The digital landscape is constantly changing.
Perhaps my biggest disappointment with MTD to date has been the failure to capitalise on the potential of the personal digital tax account. It is good that it reflects PAYE data, but there is so much more that could potentially be pre-populated including dividends, interest and – when the next phase of MTD launches in 2023 – rental and self-employment income. Yes, payers of dividends would need to make returns they do not currently have to make but, as the ICAEW report shows, pre-population works elsewhere in the world and could work here. It would need to be an incremental process, but it could certainly be achieved over the ten years of the plan. It could transform the experience of taxpayers and is the only way that George Osborne’s 2015 vision of the death of the tax return can be delivered. Encouragingly, HMRC’s July 2020 report does advocate the ‘smarter use of data’ including the ‘pre-population of tax returns’ and says that ‘taxpayers should be able to view their tax position and tell HMRC anything it needs to know through a single online account’. This suggests that significantly enhancing the personal tax account is indeed intended, a goal that was also recommended by the Office of Tax Simplification (OTS) in its recent stock take report.
Power switch
The second part of the July 2020 strategy relates to HMRC’s powers. The UK’s tax administration framework consists, the report notes, of ‘a patchwork of rules and obligations, parts of which are over 50 years old and not designed to facilitate a 21st century tax system’. The complexity of the legislation can make it difficult to navigate, frequently necessitating testing in the courts. The aim is to create a new, flexible framework capable of adapting to changing circumstances and to seize ‘an opportunity to create a simpler, more transparent framework that helps build greater trust and provide greater certainty for taxpayers’ acknowledging the need for powers to be used ‘fairly, carefully and consistently’.
There is a commitment to careful, open reform undertaken collaboratively with stakeholders including taxpayers, agents and the judiciary. It is in everyone’s interest to see the highest possible levels of tax compliance and to do that we have to share our joint experience of the system and understand each other’s perspectives. HMRC must have adequate and effective powers to collect taxes and enforce the law, but all stakeholders must see those powers as balanced and hedged around with effective safeguards. The department must also have adequate resources to use the powers it is given.
Staying in tune
If there is a single line in the report that I would like to double-underline it is the commitment to ensuring that ‘the pace and sequencing of these reforms reflect the needs of taxpayers, as well as the requirement to upgrade and improve HMRC’s own technical and communications infrastructure’. That is the nub of the collaborative approach we need and is the thing that will deliver the public confidence that the government recognises is essential in order to maintain high levels of voluntary compliance. Working with stakeholders – directly and through HMRC’s Administrative Burdens Advisory Board – will be vital if the reforms are to deliver the benefits they promise.
To reinforce the point, two recent examples spring to mind where controversial proposals sparked heated debate.
In the case of the dishonest conduct legislation in FA 2012, Sch 38, the controversy was over the definition of ‘agent’ and the word to be used to describe the behaviour to be addressed. In the case of the direct recovery of debt legislation in F(No 2)A 2015, Sch 8, the controversial issue was safeguards. The breakthroughs were largely made in informal discussions and I would commend the idea of holding more such discussions with trusted stakeholders at the earliest possible stage of the process: once announcements have been made, discussions often become far more difficult. Open, early discussions also help to ensure that changes – whether to technology or powers – are made with the needs of all stakeholders in mind.
The government will encourage public debate on the timing and frequency of payments for various taxes and whether ‘over the longer term, tax payment should be brought more into line with the increasingly real-time nature of tax reporting’.
A call for evidence will be published later in the year.
Remote control
Over recent months we have all become used to working remotely. Doing so has made many of us, whether long-term enthusiasts or recent converts, rethink our use of digital channels. We are in a period of both revolutionary and evolutionary change.
The government’s strategy builds on this recent experience. It is ambitious, but if it is approached incrementally, in a genuine spirit of collaboration, learning key lessons from the past and embracing technology for the clear and genuine benefit of all stakeholders, I believe it is deliverable.
